InvestmentHouse Weekend Update:
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- Stocks continue rebound on inflation reading as volume shrinks ahead of Memorial Day.
- Spending and income solid, PCE bearable, but energy accounts for most of the gains.
- Michigan sentiment meets expectations but consumers thinking a lot about energy costs.
- Bernanke holds tough to his line of caution on rate hikes in light of pressures facing economy.
- Strong reversal session provides momentum through Friday, but the big test is coming this week.
Rebound continues as inflation data remains tolerable.
Stocks continued higher following the Wednesday intraday reversal on that tremendous NASDAQ trade, gapping higher once more and trending upwards all session. The action was a bit better than anticipated as stocks held their gains into the close, fighting off some mid-afternoon selling to close at session highs. We thought the proximity of the 3-day weekend would send in some sellers in the afternoon and take back some of the gains after the Wednesday reversal, but the modest attempt with 2 hours left was bought and stocks posted their third straight gain.
Investors again found the economic news favorable, or at least favorable enough. Consumer spending was in line (0.6%) while income fell a bit below expectations (0.5% versus 0.7%). The PCE rose 2.1% year over year, putting it just over the Fed’s 2% speed limit. As with the Q1 PCE reported Thursday, however, the whisper was up to 2.3%; thus the 2.1% gain was a relief. Kind of the old promise one thing then deliver better idea.
Again, it was enough to keep stocks moving higher. They closed at the highs as noted, with modest but solid gains. By the close Friday, however, despite the gains, the indices were still mired deep in the holes dug over the past three weeks. NASDAQ is still well off its 200 day SMA. SP500 bounced off its 200 day SMA, something it had to do, but it is still well below the 50 day EMA. Similar story with the other indices, and indeed, SOX has yet to make any real upside move.
That picture is mirrored in many individual stocks as well, particularly among the commodities. Those stocks suffered hard selling after the strong commodity surge higher ran out of gas, and now they are at the former support they crashed through, and that often acts as resistance.
This week is thus a very important one for the market. Sentiment indicators shot higher as the selling climaxed and helped start the rebound. Stocks rebounded as expected and are now close to those resistance levels. That puts them at a crossroads: resume the selling or take a pause and then show a strong follow through session to the Wednesday reversal and try to continue the recovery.
If the market rolls over on significantly stronger trade, that is an indication the initial selling was the start of something more sinister, an indication the economy is in for more weakness than the currently strong economic numbers and forecasts suggest. On the other hand, stocks could pause this week after the rebound, collect themselves, and then deliver a strong upside follow through. Given the damage done that won’t mean an automatic resumption of the uptrend, but it sets the stage. There are still some stocks that held their ground during the selling, and thus the market has some potential leadership while the rest of the stocks lick their wounds and prepare for another move higher once they finish basing.
That remains to be seen. The jobs report is out this coming week and of course that will be scrutinized closely despite its lagging status as an indicator. We like the spike in the sentiment indicators the past two weeks coupled with the selling. These levels have helped the market resume its uptrend after some pretty hefty selling during early weak spots in the market climb. They had to climb out of serious holes back then just as now, and they did it. We still think they indicate a bottom more substantial than the three upside sessions seen last week, so we are going to be looking for more upside plays from stocks in good position to build on their trends. At the same time, however, we want to be ready in the event the market cannot make further headway and starts to sell hard once more. At this juncture we have to be realistic and ready to take what the market gives us.
THE ECONOMY
Energy pushes consumer spending higher.
April spending grew 0.6%, right in line with expectations. Problem is, if you take out the rising costs of energy, the gain was just 0.1%. That is the insidious part of rising energy prices: you have to spend money on it and it is included as part of what we are considered to have purchased, but it is burned in the tank and takes away from other parts of the economy.
The increased fuel costs are pushing into other areas of the economy as the 0.2% gain in the core PCE suggests. The gain was in line, but it pushed the core year/year PCE to 2.1%, just above the rather constrictive 1% to 2% the Fed sets as its limits. It was the highest reading in 13 months but still below the late 2004 high of 2.3%. The bump higher, however, gets the tongues wagging about the need for further and more intensive rate hikes. As noted above, however, the reading was below many expectations and thus the market skated past it on the session.
But where is the PCE on a historical basis? Everyone talks about the core rate and how the Fed (at least the Greenspan Fed) views it. When you look back at the past 15 years, however, the growth rate is still at the low end of the range. Back in 1990 the core PCE was up at 4.7%. From 1990 to 1998 it fell to 1%. Since then it has traded in a range from 1% to the 2.3% hit in late 2004. It is definitely at the top of the range, but it has been here before, and during this 8 year range we have had 2 bear markets (1998 re the Russian currency crisis, and 2001 re the Fed screw up), a recession, and three solid expansions. The point: it seems the PCE acts more independently of Fed action than you would think, instead responding primarily to economic conditions and the type of growth and economic stimulus we have. The data certainly suggests that the correlation is a bit weak with respect to Fed action.
Still the same problem confronting the market.
That simply takes us back to the same old problem for the market: how far does the Fed go? The market fears the Fed going too far. Understandable given a quick look at the economic history textbooks.
That is why Bernanke was once more driving home the point about Fed policy necessarily being forward-looking, i.e. examining the problems lying ahead (e.g., housing, high energy prices, 16 rate hikes already in the pipeline) as opposed to some dogmatic, cookbook view of inflation possibilities in an expanding economy.
Basically Bernanke is still saying, in not so explicit terms, that the Fed wants to pause at the June meeting and see how things go from there. Nothing new here, but as we have said before, this appears to be a sane approach, yet it is one that is getting panned by the new inflation hawks popping up after the commodities blow off run.
Michigan sentiment in line but fades as consumers worry about gasoline costs.
The May reading came in at 79.1, just above the 79.0 expected. That, however, is well off the feel-good 87.4 April reading. Current conditions fell to 96.1 from 109.2, and the Michigan survey team said the pervasive theme was higher gasoline prices making consumers edgy near term. Expectations fell as well, from 73.4 to 68.2.
The overall reading is still no threat to consumer spending, but it shows the erosion that $3/gallon gasoline has on the consumer psyche. We said $3 is the psychological choke point for consumers, and as gasoline continues to dance around that $3 level we have seen demand fade as consumers pull in their horns. The longer it lasts, the tougher it is to keep the wallets open. It has a mental aspect that combines with the very real issues relating to less money in the wallet to spend after filling up the tank. We said it before, you have to have gasoline to get to the mall, and with prices rising, that means you have less money when you get to your favorite store.
THE MARKET
MARKET SENTIMENT
As noted Thursday, the sentiment indicators are backing off from their spikes higher during the selling, having done their job. Now it is up to the buyers to take over.
VIX: 14.26; -1.24
VXN: 18.58; -1.11
VXO: 13.08; -1.07
Put/Call Ratio (CBOE): 0.75; -0.16. Second session below 1.0 after 9 straight 1.0+ closings. Pretty strong indication of negative views about the market’s prospects.
Put/Call Ratio (CBOE): 0.91; -0.51. Closed below the 1.0 level for the first time in 10 sessions. Definitely high levels on this run that suggest too much belief in the downside move.
Bulls versus Bears:
Bulls: 43.8%. Bulls dove back to levels hit three weeks back, dropping sharply from the 46.3% last week. That is a solid drop from the April peak at 53.2% and closer to the 42.3% hit on the last low. It is also just above the levels hit in May and October 2005 that saw new upside runs.
Bears: 27.6%. Solid jump from 25.3% the week before. That is still below the 28.6% hit three weeks back. Bears peaked well below the 33% hit on the high the last time bears started growling. The 33% high hit last cycle topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: +12.13 points (+0.55%) to close at 2210.37
Volume: 1.576B (-22.74%). Definitely holiday volume Friday, coming in well below average (2.1M). Thursday was below average as well after that huge Wednesday reversal surge. We expected lighter trade, and the holiday made it harder to read the response to that reversal session. Not surprising to see lower volume after the surge; the key is how the market responds this coming week. Still looking for a follow through session on a return of that strong volume.
Up Volume: 1.013B (-644M)
Down Volume: 532M (+180M)
A/D and Hi/Lo: Advancers led 1.55 to 1. Not bad, not great, but Thursday was solid.
Previous Session: Advancers led 2.79 to 1
New Highs: 86 (+28)
New Lows: 43 (-26)
The Chart: (Click to view the chart)
A reversal and another couple of up sessions pushed NASDAQ higher by about 3% to end the week. Friday it cleared the 10 day EMA (2206) but that leaves it 19 points off of its 200 day SMA (2229) heading into a short weak. Might very well see some weakness to start the week, and that would set up a follow through session. It made the move it had to make, and the reversal was impressive. It has to get the follow through buying at some point this coming week.
SOX (+0.82%) posted a decent gain, but it has barely moved as the rest of the market rebounded. It is holding some support at 460, but ahs resistance at 470 and again at 480 as it tries to set an interim bottom and start back up. Disappointing that the semiconductors could not move with the market, and that is a continuing issue for NASDAQ as it moves up to test resistance.
SP500/NYSE
Stats: +7.28 points (+0.57%) to close at 1280.16
NYSE Volume: 1.34B (-22.84%). First below average volume for the large caps in three weeks, but it was holiday trade so we are not going to make much of it. Volume was strong Wednesday on the reversal, but not as strong as NASDAQ. It gave it the momentum to close the week positive, but it starts anew this coming week as SP500 moves up to face resistance.
A/D and Hi/Lo: Advancers led 2.39 to 1. Another good session as SP600 was a market leader once more.
Previous Session: Advancers led 3.37 to 1
New Highs: 42 (+7)
New Lows: 83 (0)
The Chart: (Click to view the chart)
SP500 moved up through some more resistance, heading toward the 18 day EMA (1283). The more important test is at the 50 day EMA (1291) and the January and February highs near 1295. Digging out of a hole is always daunting, and the sharp, steep decline by SP500 makes it no easier. Expecting it to run into that 1295 resistance and fade back some before breaking higher with a follow through.
Similar action on SP600 (+0.34%) after it tested its 200 day SMA (364) on the Wednesday low and reversed sharply. Hit some resistance at 380 Friday from the January and February highs, already hitting that resistance ahead of SP500. Expecting a bit more upside but then it is going to make a test before it gets to the 50 day EMA (386.50). From there it will show if it has the mettle to once more help lead the market.
DJ30
Continued higher as well, but with a bit more authority. It made it to the 50 day SMA (11,281), putting it within striking distance of the very important 11,335 March high it will have to deal with if it is going to continue its move higher to once again take on the all-time high up near 11,700. If it stalls at 11,335 that will certainly scare the market once more and provide another ramp up in sentiment indicators. That second spike is always a good part of a bottom. We will see. Big week.
Stats: +67.56 points (+0.6%) to close at 11278.61
Volume: 240M shares Friday versus 295M shares Thursday. The volume was so light you could not make anything of it. Needless to say, however, DJ30 and the other indices will need to show strong upside follow through volume at some point this coming week as they extend the move that started with the Wednesday intraday reversal.
The Chart: (Click to view the chart)
TUESDAY and the week ahead.
Needless to say, a big week ahead. Post holiday, rebound attempt, jobs report on Friday. Post holiday sessions when the market has been weak overall (and despite the late week rebound, the predominant attitude of the market is still weakness) can be kind of rough. Indeed, how stocks respond on Tuesday will tell us just how this rebound is sitting. A modest light volume fade is not big deal; it sets up another move that could deliver a follow through session. Strong volume selling (not just stronger than the weak Friday trade, but a strong above average session) is not what you want to see for the health of the rebound attempt.
As noted, many of the leadership groups such as commodity stocks were really hurt in the selling and even with the rebound are still closer to the bottoms than the highs and that means below resistance. Even if we get a follow through next week, many of these stocks will still need quite a bit of time to rebuild their patterns to rally again unless there is just a tremendous surge of buying once more.
Even those stocks that are still leading, however, are also not clearly defined. Looking across the market we still see good stocks holding up well, using the selling to test or to complete nice bases and rallying to end the week. There are no clearly defined leadership groups, however. Instead it is more of a mish-mash of stocks from all parts of the market. Typically you get sectors that lead as money rotates from one industry group to another. Right now there is no clear rotation; there are leaders trying to take control, but the market has not made a decision.
That still means we have to be patient and let the market makes its move. We like the reversal and the sentiment that helped make the turn. We have bought into some stocks that used the reversal to move higher out of solid bases or rebound from nice tests. We are not loading the boat, however. Even with the reversal session, the selling has still been more intense than the buying. Until the market shows a follow through we just have to nibble at good moves and exercise as much patience as possible.
Thus we are going to continue looking at those leaders set up to make moves, yet at the same time we are looking at some downside plays in stocks that formed toppish patterns, sold, and then rebounded in the late week selling to resistance. There are also stocks in continuing downtrends that are ready to sell once more after this late week move higher brought them back up to there trendline. They are likely to continue lower regardless of what the rest of the market does given their entrenched downtrends.
To sum it up, a big week ahead for the market in determining if it continues the recovery or gives up and things really get ugly. How the market responds Tuesday will be the first indication of its fortitude (or lack thereof), and we are going to be ready with plays on both sides of the fence.
Support and Resistance
NASDAQ: Closed at 2210.37
Resistance:
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
The 18 day EMA at 2232
2240 is closing low in February range.
2273 is December 2005 closing high.
The 50 day EMA at 2274
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2205 is the December 2005 closing low
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2142 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1280.16
Resistance:
1280 from the April lows
The 18 day EMA at 1283
The late January peak at 1285
The 50 day EMA at 1291
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
The October/April trendline at 1314
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1275
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 200 day EMA at 1258
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1225 from the March 2005 high
Dow: Closed at 11,278.61
Resistance:
The 18 day EMA at 11,275 is giving way
11,300 is the October/January/February up trendline.
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
11,425 from April 2000 peak
11,452 from December 1999 peak
11561 is the DJ30 closing high
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.
Support:
The 50 day EMA at 11,251
11,159 is the February high.
11,097 to 11,137 is the last peak from the February top.
11,044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
May 30
- Consumer confidence, May (10:00): 100.0 expected, 109.2 prior
May 31
- Chicago PMI, May (10:00): 56.2 expected, 57.2 prior
- Crude inventories (10:30)
- FOMC minutes, May (2:00)
June 1
- Initial jobless claims (8:30): 320K expected, 329K prior
- Productivity, Q1 (8:30): 4.2% expected, 3.2% prior
- Construction spending, April (10:00): 0.0% expected, 0.9% prior.
- ISM Index, May (10:00): 55.7 expected, 57.3 prior
June 2
- Non-farm payrolls, May (8:30): 170K expected, 138K prior
- Unemployment rate (8:30): 4.7% expected, 4.7% prior
- Average workweek (8:30): 33.8 expected, 33.9 prior
- Hourly earnings (8:30): 0.3% expected, 0.5% prior
- Factory orders, April (10:00): -1.5% expected, 4.2% prior. |
