InvestmentHouse Weekend Update:
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- Market slips on Iranian oil spill with some panic selling fueled by expiration.
- Early Michigan sentiment is higher, but with gasoline rising it may not last long.
- Oil prices rise, but who sets the price?
- Current rally at a do or die point but indices still holding their uptrends.
Stocks close out expiration with a wild slide.
The indices took their worst whipping of the year with index losses in the 1.5% to 4% range, immediately giving up Thursday’s rebound from the prior selling. The action pushed the laggard DJ30 negative for the year and many news stations reported that fact with the usual excitement that goes with a juicy though meaningless headline. Yes, meaningless. DJ30 is a laggard index made up mostly of stocks past their growth prime. Calling it a leading indicator of the stock market is similar to calling the desktop computer the future of personal computers.
Not that the other indices escaped unscathed. NASDAQ and SP500 were thumped down to the 50 day EMA while SOX and SP600 closed up the week a bit better off at their 18 and 10 day EMA respectively. The support each index held (or in the case of DJ30, failed to hold) pretty much spelled out their leadership position in this rally: SP600 and SOX on top, NASDAQ and SP500 following.
Some more earnings disappointments were widely reported as the culprit (e.g. MOT, GE, C), but the real issue was oil. It was over $67/bbl pre-market and moved over $68/bbl by the close. Oil is impacting profits, so the earnings miss were a by-product of high oil. Iran was also blamed, but Iran is a subset of the overall oil problem as well, the latest in a series of issues that have driven oil prices higher and higher. Indeed, every time oil looks as if it is just about to roll over it gets new life. That is the sign of a dogged bull market in oil.
Anyway, it seems the market woke up to high oil prices Friday when news hit that Iran was pulling money out of European banks and stockpiling medicines. Iran is anticipating economic sanctions and is battening down the hatches. It doesn’t hurt that it has a couple of years of $40+/bbl oil that has filled its coffers and gives it the staying power to ride out sanctions. Iran wants to be a nuclear power. It views itself as the last chance for the Arabs to reclaim a place on the world stage now that Hussein is gone, and it is going to go for a bomb regardless of sanctions, censure, etc. It has clearly shown its intentions and it will use further talks to complete its preparations just as Germany used peace talks to stall the allies while it completed its war buildup.
With that reality becoming clearer oil continued its march (and actually picked up the pace a bit) and stocks skidded lower. The selling was not out of hand early, but when stocks did not rebound in the afternoon some panic set in. We heard it from some floor traders and received calls from some big clients worried about a meltdown. Volume was up, stocks were down, breadth was lousy, oil was jumping, and the future was surely hellish. We would call that some panic.
It was a lousy day indeed, but a lot of the action was also spurred by expiration. Volume was fueled by expiration and not just sellers dumping shares. That gave the session an extra ugly look that it likely did not deserve. Why? Oil service companies led the upside action Friday, but the recent leaders and indeed most all of our plays managed to hold their near support. Further, the indices are still in their uptrends; the rally is at a critical point, but the trend higher is still in place.
Oil is indeed a problem as we have discussed in recent weeks, and it is running to post-Katrina levels, throwing a shiver into the market. The question is whether this is the start of the end or just a correction in an uptrend. Those can be sharp and scary, but they typically fast. As long as the leaders (e.g. MRVL, BRCM, MSTR) hold their near support the rally can hold its own. If they cannot hold the fire then we close them and play the downside opportunity, taking what the market gives.
THE ECONOMY
Preliminary Michigan sentiment rises, for now.
The 93.4 reading topped the 92.5 expectations and December’s 91.5 final reading. That keeps sentiment in solid shape and on its steady recovery since gasoline prices started to fall following their post-Katrina spike.
That is likely to be tested by the time the final read comes out in two weeks. Gasoline has already been on a steady climb of late, driven by a variety of factors, the latest being the Nigeria attacks and now the Iran issues. Now that oil has jumped another $5/bbl just recently, gasoline will climb and sentiment is likely to take a pause. World tensions are one thing, but reaching into a consumer’s pocket is harsh reality.
Of course sentiment is not near a level that would cause any concern of a consumption drop off. It trended lower after Katrina but recovered nicely as we realized we were going to overcome those challenges. The real test will be in the summer when gasoline tops $3/gallon even without a storm. When the storm comes and threatens Gulf production again, it could get a bit ugly.
Who controls oil prices?
Bill O’Reilly continues his rampage with respect to oil and gasoline prices. His thesis is that oil companies are gouging. That is it. They are jacking up prices when they don’t need to. He has this idea that the large oil companies set the oil price that we have to pay. Numerous guests have appeared to painstakingly explain why that is not the case, but it is akin to talking to a brick wall. O’Reilly is convinced it is greed and gouging.
Someone needs to send O’Reilly a high school economics textbook. Exxon, Chevron, OPEC and others don’t sit down and say ‘this is what we will take for a barrel of oil.’ Oil prices are set by the markets where oil futures are traded. Markets are emotional. Markets factor in risks such as Iran wanting to build nukes and the world readying to stop it. Risks such as attacks on production facilities in Nigeria. Risks that Gulf production won’t come back on line at the same capacity (as seen after Katrina). Those risks require a premium because no one knows the outcome. Why are long term interest rates typically higher than short term? Risk and uncertainty about the future.
O’Reilly still seems to think that even if companies don’t set the price they should not raise their prices just because the market price rises. He claims, as do many of the uninformed in Congress, that the companies are making a windfall. Profits have tripled all because price has risen, and thus they claim oil companies should refund some of these ‘excess’ profits.
Problem is, this tripling of profit is from levels that lag just about every other sector in the economy. Oil and gas is a boom and bust business. If companies don’t get the benefit of the boom they cannot make it through the bust. What if seasonal businesses such as those in summer or winter tourist destinations had to give back their ‘excess’ profits during the season? What if retailers had to give back a chunk of their ‘windfall’ sales during the holiday season? They would likely not survive.
It is a touchy problem because their product directly impacts all of us every day from what we put into our cars, heat and cool our houses, cook our food, etc. That is why emotions run high with respect to what is reasonable and what is necessary to maintain a healthy domestic industry that can help offset what we have to import and whether it is the government’s business to limit profits private industry can make. If it wants to make it a monopoly, maybe. Of course, how many industries do we want the government to control, comrade?
THE MARKET
MARKET SENTIMENT
Volatility remains at historically low levels, but it did jump Friday. It did not clear any of the highs from the past year (did clear the intermediate high in August), but it made the strongest move since October. All sentiment indicators remain at levels considered historically low, and that is fueling some commentary about an unsustainable rally. Perhaps that is the case.
In any event volatility jumped as did the put/call ratio. Given this was expiration, however, you cannot ready too much into those moves. Expiration is typically volatile and option contracts are rolled out at expiration, so higher readings are somewhat normal. The changes, however, were larger than typical.
VIX: 14.56; +2.58
VXN: 19.45; +2.94
VXO: 14.09; +2.37
Put/Call Ratio (CBOE): 1.08; +0.21. Readings above 1.0 can indicate a turn in the market, but this is just the first and it was on expiration Friday as well. It needs to show a series of these to have much meaning, and if there are a series that means the market is suffering more selling.
Bulls versus Bears:
Bulls: 57.3%. Up slightly from 56.8% the week before. That was a one-week decline after hitting 60.4% the week before. Still over the 55% level considered extreme. This, as with VIX, is an indication and not a fact of market direction. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.9%. Creeping higher after 22.1% and 23.7% the prior two weeks. That followed a low at 20.88%. 20% is the threshold where a lack of bears is considered extreme and bad for the upside. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: -54.11 points (-2.35%) to close at 2247.7
Volume: 2.404B (+0.95%). Volume was up again, remaining strong to close out the week. Trade jumped Wednesday on the INTC and YHOO earnings disappointment and the gap lower. It remained strong Thursday on the rebound. Then Friday volume was solid again on expiration and as NASDAQ dove lower. Some distribution with some panic selling late in the session in addition to the typically higher expiration trade.
Up Volume: 261M (-1.367B)
Down Volume: 2.122B (+1.403B). Impressive 8:1 downside volume lead. That is close to an extreme level in itself.
A/D and Hi/Lo: Decliners led 2.67 to 1. Good advancing breadth Thursday, strong downside breadth Friday in response. That wipes out that solid session Thursday.
Previous Session: Advancers led 2.22 to 1
New Highs: 172 (-41)
New Lows: 35 (+10)
The Chart: (Click to view the chart)
NASDAQ never saw the green Friday, starting slightly lower and selling all session. It made three of the weakest rebound attempts you have ever seen, only cracking the 15 minute MA once. That means the downtrend was tenacious. NASDAQ managed to close just above the 50 day EMA (2244), but it gave up the December highs (2273, 2278), putting its breakout over the December highs is in jeopardy. NASDAQ has not lost this much in a session since January 2005. Hmmm. NASDAQ remains in its uptrend from the 2004 low (that is not close to being threatened, and it is right on the trendline leading higher from the late October low. This is an important point for NASDAQ but it is not the end of the rope if it does not hold. NASDAQ is still holding the bigger breakout from its 2 year ascending triangle. That breakout is down at 2200 to 2180. We will see how NASDAQ responds this week. It will likely show a bit more downside momentum before finding some support and trying a rebound.
SOX (-4.15%) was hammered the hardest because it gained the most on the upside. Higher delta, meaning bigger moves both up and down. Held near the 18 day EMA (513.28) on the close and holding above the December highs (505.25 closing). The October up trendline is down at the 50 day EMA (495.36); SOX is easily holding that trend, but it was repulsed after it tried that early January high (539) on Thursday.
SP500/NYSE
Stats: -23.55 points (-1.83%) to close at 1261.49
NYSE Volume: 2.116B (+19.38%). Volume was the highest of the year and indeed since March 2005. Big spike as SP500 pancaked down to the 50 day EMA. The large caps are under a lot of pressure s investors are dissatisfied with their earnings guidance, i.e. their ability to generate growth.
A/D and Hi/Lo: Decliners led 2.31 to 1. Basically mirrored the Thursday upside breadth. Both were strong but the downside move accompanying the weak breadth was impressive.
Previous Session: Advancers led 2.43 to 1
New Highs: 240 (+9)
New Lows: 43 (+10)
The Chart: (Click to view the chart)
Swan dive to the 50 day EMA (1260) on the strongest volume in 10 months. Sure some was expiration, but unlike NASDAQ, the strong jump indicates something more than expiration. Large caps were sold readily Friday; despite analysts again saying small caps are dead and that large caps are the ticket, the only ticket they are holding is south. Key test for SP500 at the 50 day as it has given up the December highs (1275 and 1273) and thus that breakout. It broke through the October up trendline but still holds its breakout over the August 2005 high at 1245, the move that took it to a new post-October 2002 high. It will likely test lower to start the week, and how it holds that breakout will tell more of the story.
SP600 (-1.30%) held up the best Friday, but even that gave back the entire Thursday move, a move that looked ready push the small caps to more serious gains. It held near support at the 10 day EMA (364.96, closed at 364.97). Decent strength but likely to test the 18 day EMA (362.76) as it did on the Wednesday low when it rebounded intraday. Interestingly, given SP500’s massive drop, relative strength broke out on the move. A test and hold at the 18 day EMA or even down to the December high at 361.46 would be a good showing of strength.
DJ30
Thursday we said DJ30’s action was pretty pathetic. Friday it was really pathetic, diving through the 50 day EMA at 10,800. That undercut the entire December range as well as the July and August highs as well that marked the ‘hump’ in the double bottom. Volume spiked to the highest since the September selling. Weak, pathetic, hapless. Pick your favorite adjective. Does the rest of the market need it? Not really, but the market always does its best when it is rowing together.
Stats: -213.32 points (-1.96%) to close at 10667.39
Volume: 449M shares Friday versus 370M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
Several economic reports this week (leading indicators, existing home sales, durable goods orders, advance GDP, and new home sales. Those take a back seat to a huge week of earnings, the meat of the schedule and where we will really see what the outlook is. Overlaying all of that information is oil and its moves toward $70/bbl. That level is something of a choke point, and the market is somewhat choking already as oil topped $68/bbl Friday.
The key question with oil and the outlooks we are seeing from some of the large caps is whether oil is reaching a point where an economic slowdown follows. The economy has been amazingly resilient as oil ran from $35 to $45 to $50, $60, etc. It cannot be completely elastic to oil price increases indefinitely. Companies have been unable to pass many cost increases along, and that is cutting into profits. If oil continues to rise it will continue to cut and it also hits consumers as well. If they try to raise prices consumers will simply buy less. A vicious cycle, but since the market grows on earnings growth, if companies continue to lose profit ground to higher energy costs, that does not bode well for the market.
That makes this week a key week for stocks after an ugly expiration Friday. Will they check up after a bit more selling, regroup and set up another upside break or will they continue lower on continued volume, snapping support in what could be a forecast of a slower economy to come. Let’s not forget that the bond yield curve is flat to slightly inverted the past week, and that typically indicates slow growth to recession. Sustained high oil prices, the Fed still raising rates, and a flat to inverted bond yield curve. That is a murderer’s row of economic indications.
NASDAQ and SP500 broke out from long bases in November, and still hold those breakouts even with the Friday dump lower. If they can hold those long term base breakouts that would indicate more upside to come; the market is the best indicator of future economic activity. Friday could be the start of another ugly January selloff that kills a breakout attempt or it could just be a hyperactive expiration where investors were unloading large caps that had lower growth predictions in order to free up money for those areas that are showing the growth, i.e. small caps, technology, chips, medical and healthcare.
We expect a bit more downside follow through that tests the prior breakout, and then we see how the buyers respond. Many market leaders are holding at their near support, basically all of the plays on the report. They may undercut early but we will be looking for a rebound; if they hold that gives the market a footing to hold the longer term breakouts, set up once more, and then try another run higher.
Support and Resistance
NASDAQ: Closed at 2247.90
Resistance:
2251 is the January 2001 low
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 18 day EMA at 2280
The 10 day EMA at 2287
2288 from December 2000 low.
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 50 day EMA at 2244
2220 (2218 intraday) is the August high
2216 is the August 2005 high
2205 is the second October up trendline
2178 to 2182 from the December 2004 high and the September 2005 high; these roughly mark the breakout from the 2 year base.
S&P 500: Closed at 1261.49
Resistance:
1264 from the December 2000 lows
The recent highs at 1275 (intraday) and 1273 (closing)
The 18 day EMA at 1275
The 10 day EMA at 1278
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 50 day EMA at 1260
The August 2005 high at 1246
The September 2005 high at 1243
March 2005 closing high at 1225 and intraday high at 1229.11
Dow: Closed at 10,667.39
Resistance:
10,720 is the high in the recent lateral move
10,754 is the February high
The 50 day EMA at 10,798
10,868 is the December 2004 high
The 10 day EMA at 10,867
The 18 day EMA at 10,873
10,965 from Q4 2000 and late November 2005
10,985 is the March intraday high
11,176 – 11,186 from April 2000
11,248 from the May 2001 peak.
11,238 from the September 2000 peak.
Support:
The June highs at 10,646 to 10,656
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
January 23
- Leading Economic Indicators, December (10:00): 0.2% expected and 0.5% prior
January 25
- Existing home sales, December (10:00): 6.90M expected and 6.97M prior
- Crude oil inventories (10:30): +2.741M prior
January 26
- Durable goods orders, December (8:30): 1.0% expected and 4.4% prior
- Initial jobless claims (8:30): 271K prior
- Help wanted index, December (10:00): 40 expected and 39 prior
January 27
- Chain Deflator, Q4 (8:30): 2.6% expected and 3.3% prior
- GDP, advance, Q4 (8:30): 2.9% expected and 4.1% prior
- New home sales, December (10:00): 1.235M expected and 1.245M prior |
