InvestmentHouse Weekend Market Summary
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- Intel rally boosts indexes back to resistance on low volume.
- Government employment numbers not in sync with reality.
- Weak rally to resistance ahead of 9-11 sets up more downside.
- Subscriber Questions.
Another bounce without a lot of substance.
In keeping with the wandering for the week, the market bounced higher Friday on the news de jour. Friday it was Intel’s poor mid-quarter numbers that were not as poor as expected. In short, Intel believes business is still crappy, just not as crappy as investors feared. Gee, now let’s go out and buy the stock because it is not as bad a value as we thought. I am not sure about you, but my dad taught me that even if you kiss the best looking pig in the bunch you are still kissing a pig. Intel’s numbers may be more palatable, but it is not a growth story; buying a stock because things are not totally black is never a good plan of action.
On top of INTC, some employment numbers that looked good in headline print (the fine print is full of potholes again) added upside enthusiasm. That helped drive the indexes to a solid point gain, but there was no volume and they all managed to close below near support. Once again the market was yanked in the direction of the most recent story, a sign of a weak market that is prone to significant upset. A weak bounce on questionable ‘good news’ that stalls at resistance is not comforting. Given that the 9-11 anniversary is up this week we anticipate more weakness for the week given the uncertainty of attacks and the proximity of some action against Iraq.
THE ECONOMY
Unemployment falls to 5.7% and payrolls rise. All is well in the economy, right? Ha.
The headline number was a surprise as expectations were for unchanged at 5.9% and we were expecting even higher given all of the recent layoffs and layoff announcements the past 6 weeks. Weekly jobless claims are rising, surpassing 400K the past two weeks with the 4-week average rising for over a month. What gives?
First, the unemployment figure is derived from a telephone survey. ‘Hello, this is the government. Do you have a job? Answer yes or no.’ The sample is statistically very small and many economists were questioning its accuracy today. Again, just look at the rising jobless claims each week and the continued layoff announcements.
Second, the labor pool was supposedly shrinking, falling to below 600K according to the feds. A smaller labor pool? Hey, that must mean more jobs and less unemployment. End of crisis! Are there really more jobs out there soaking up the labor pool? As noted, that flies in the face of the weekly jobless claims (the contemporaneous data) that show rising claims AND rising continuing claims, not to mention that companies keep saying they are putting off hiring for now (they are using temp workers for now). The job pool could very well be shrinking, however, at least as measured by the government. You only get so much unemployment and then your benefits run out. After that you no longer show up on the rolls. You drop off the radar and out of the labor pool as far as the government is concerned even if you are looking for a job (some do just give up, but most keep looking). The labor pool is not shrinking because of all these jobs supposedly created the past two months, it is growing still. You have to look through the cracked prism of government calculations to make the determination that things are better because the jobless pool is shrinking.
Non-farm payrolls jump 39,000, ahead of 30K consensus while July jobs revised to 67K from 6K.
Wow. Payrolls (an actual hard number as opposed to the unemployment motor voter poll) scored solid increases the past two months. This is the lifeblood of the economy as jobs are what provide money to spend on goods and services, and that in turn allows companies to spend and hire more, etc. The economic version of the ‘circle of life’ from the ‘Lion King.’ If they were so strong for two straight months, surely the economy is on its way to nirvana.
Don’t rejoice yet. Manufacturing payrolls fell a whopping 68K, making it 26 consecutive declines. Go try and find a manufacturing job; just know where the unemployment office is before you leave so you can kill two birds with one trip. But hark, service sector jobs were up 100K. As the economy is 5/6 services, truly this must be good news. Ah but a huge chunk, 41K, were government jobs. Yes government jobs put people to work, but they don’t grow the economy. Why? Because the jobs are paid for by taxes, either income, property, excise, etc. Did you realize that you are taxed at a 50% rate on your earnings? When you factor in all of the taxes (all of the ‘hidden’, a.k.a., forgotten taxes such as gasoline, telephone, school, property, etc.) you give the government 50% of what you make. The $64 trillion question: why can corporations write off/expense office space, phones, cars, salaries, supplies when you cannot write off housing (mortgage deductions are pathetic substitutes and are on the chopping block always), transportation, or any of the other things that are necessary for the business of living?
But I digress. Government jobs take from the economy without giving back. They don’t create things or services that add to the economy because it takes our dollars out of the economy (where they would really be put to use) via taxation and gives them to the government where they are spent not according to market principles but according to largess. Very few pennies ever make it back to the economy given the government bloat. Thus government jobs are a negative for the economy longer term because they suck investment dollars away. If you back out the government jobs as should be done to determine if you have a healthy economy and not just an overspending government, you have a net job loss for the month. The market knows this and that is one reason Friday’s rally was a low volume bounce.
Problem: ‘better’ numbers mean no help for the economy.
The economy may be recovering, but it is doing so at a dreadfully slow pace. At this rate all of those retirement dollars lost won’t be recouped until many of those that lost their retirements have worked themselves to their graves. Think of it as recovering from a disease without getting the medicine that would give you a rapid recovery. If you get the drug, you can recover fully in six months and then go about business as usual. Without the drug, you convalesce for two to three years before you are strong enough to even get out of bed. Then there is rehab, etc. before you can even approach feeling how you were before if ever.
What this headline employment report does is keep the miracle drugs, i.e., any meaningful help, at bay. Our leaders see the jobless rate falling and jobs supposedly up and feel comfort that we are too stupid to know that is not the case. Our elected officials have shown almost conscious indifference to helping the economic recovery over the past 9 or more months because they have the belief that things are getting better and they want to make political gains. Republicans are caught up in war fever, forgetting that you need to make sure everything at home is taken care of first; remember that old story about the men that leave the village to wage war and come home to find it all in ashes? If the economy tanks we are all in deep, so better get that in order first. As for the democrats, they are caught up in regaining power in November and figure a continued weak economy won’t hurt that effort. They would just as soon see things trudge along going nowhere and one way to do that is oppose making tax cuts permanent as that leads to long term uncertainty and thus no business investment. Trent Lott pretty much said Friday that Congress was just too busy to get anything done with respect to investment incentives during the rest of the session. For Pete’s sake, they just got back from summer vacation. Stay after school and do your homework if you have to kids, but do what you have to do to get those you represent jobs so they can try to save. There is so much scolding about not saving enough for retirement, but our leaders are not doing enough to put people back to work so they can save for retirement. Some investment tax credits, accelerated depreciation, payroll tax holidays, permanent tax reductions, eliminating the dividend double tax, eliminating the capital gains tax. A package of those incentives would be the miracle drug to get this post-boom recession kicked and a healthy, robust recovery underway.
We have been more or less told it won’t happen. Time to get on the phone to representatives and senators and demand action. It worked in 2001 when the stimulus package was dead in the water, and it can work now. These folks need guidance, and direct calls outlining a reasonable and reasoned approach do wonders. Look at the historical facts: when tax rates have been cut interest rates have gone down (contrary to some of the misinformation circulating now that ignores history) and tax revenues have gone up. If you receive any disagreement, ask them to show you one time in history when taxes were cut that tax revenues did not rise in aggregate over the next three years. They cannot because it has not happened. When taxes have risen, interest rates have gone up and tax revenues fall after an initial bump (rates rise initially IF the economy is in good shape when tax rates are increased; otherwise it just kills what little business activity there is and revenues fall). Deficits? No impact on short or long term rates; if your representatives or senators are worried about that, just tell them to hack off several trillion from their spending programs that CAN WAIT given the economic climate. Call them. Take action and demand action. It is our future and our money they are taking and squandering.
What is behind the plunging interest rates, and are they good or bad?
We were going to put this in this report, but there is too much already in this report. We will cover this topic in the coming week. For now note that lower interest rates are considered a good thing, but they can go too low, suggesting deflation. That is being ruled out by most, but we are not that confident. And is it just fear of a weak economy that is pushing rates lower, or is it in part the mad rush to bonds that right now is equaling the mad rush to stocks, particularly high tech, in the late 1990’s? This is fascinating. We are seeing another historic distortion in the making as the baby boom investor class stampedes to bonds.
THE MARKET
In keeping with the up and down action, Friday responded to the news. Thursday there was concern about jobless claims and Germany that sent things lower, and Friday Intel’s not as crappy as anticipated quarter and headline employment numbers sent the market higher. A market that is jerked up and down by each passing news story is not a strong market. It closed on low volume right at resistance, backing off in the last half hour. With 9-11 approaching we anticipate more nervous, downward trending action. Overall the lower volume slide lower is decent action that could lead to a quiet test of the July and August lows.
Sentiment Indicators
The back and forth index action is batting the sentiment indicators back and forth as well. We still want to see them ratchet higher as the indexes move toward the July and August lows, giving a high anxiety but low volume test. That is very good bottoming action to look for.
Bulls versus bears: Bullish investment advisors retreated last week but still held the upper hand. We would like to see them fall back below the bears in number once again on further selling.
VIX: 40.04; -2.19. After vaulting to near 45 on Tuesday, the VIX has settled back to 40. We would like to see it climb to 55 on a further slide lower, but it would take some consecutive selling sessions to do it.
VXN: 56.54; -4.18
Put/Call Ratio (CBOE): 0.79; -0.1. The ratio shot to close over 1.0 Tuesday, meaning more put buyers than call buyers. That is an extreme condition as investors tend to be more bullish than bearish. It usually takes more than one close, accompanied by other sentiment indications to give a stronger rally.
Nasdaq
Rallied on the Intel news, getting a big helping hand from the SOX. Volume was weak and the index stalled at the 10 day MVA and fell back. We expect more downside.
Stats: +44.3 points (+3.54%) to close at 1295.3
Volume: 1.322B (-12.96%). No volume strength to back the move.
Up Volume: 1.094B (+840M). Volume continued to follow the news for the day; there were either buyers in the market on days of good news, or sellers in the market on days of bad news. Neither could take control.
Down Volume: 189M (-1.056B)
A/D and Hi/Lo: Advancers led 2.26 to 1. Again, there were either buyers or sellers as most sessions the A/D line tracked the trade at a 2:1 ratio on average.
Previous Session: Decliners led 2.45 to 1
New Highs: 26 (+7)
New Lows: 84 (-45)
The Chart: (Click to view the chart)
Gapped up on the Intel news and rallied close to the 10 day MVA (1308.23) on the high (1304.02), and then backed off to close below resistance at 1300. It was a weak move on low volume, stalling out at resistance after two attempts to break over it during the session. The action was again a bounce on relief that Intel’s numbers were not going through the floor all at once; that does not provide a sustained push, particularly with no massive volume on the news. We expect the rally to fail at this resistance and further test the August low (1206) or the July intraday low (1192.42). Again, a lower volume test of those levels is a very good bottom formation.
S&P 500/NYSE
Attempting to hold at 877 on the low the last several sessions, the large caps made another run at resistance but could not make the break.
Stats: +14.77 points (+1.68%) to close at 893.92
NYSE Volume: 1.171B (-11.78%). Very light, below average volume on the moved up to test resistance.
Up Volume: 857M (+519M)
Down Volume: 330M (-652M)
A/D and Hi/Lo: Advancers led 2.61 to 1. The solid NYSE breadth can be attributed to the mid and small cap stocks as the S&P 400 rose 2.8% and the S&P 600 rose 2.4%. This provides some longer term strength for the market even as it moves lower to test the July low.
Previous Session: Decliners led 1.91 to 1
New Highs: 65 (-13). New highs fell on the gain, a telling sign the rally move was not that strong.
New Lows: 29 (-39)
The Chart: (Click to view the chart)
In a late surge the large cap index rallied toward resistance at 900, but could not even crack it, topping out at 899.07 and then rolling down in the last hour, unable to move over price resistance at 900 or the 10 day MVA at 904.87. The index is attempting to use the 877 level as support, but it looks as if this rally attempt will stall at 900 for a further test of the July low (775.68 intraday; 797.70 closing).
Dow:
Stats: +143.5 points (+1.73%) to close at 8427.2
Volume: 1.171B (-11.78%)
The trading range measured by the open and close the past three sessions is consistent: 8425 on the high, 8275ish on the low. There is resistance at 8500 (8474.71 hit on Friday’s high) as well the 10 day MVA (8546.24) and the March down trendline at 8545. While the Dow has shown resilience at 8250 support, it will most likely follow the Nasdaq and S&P 500. It may rally again toward 8500 or the 10 day MVA first and then move down for a test of the July low (7682 closing; 7532 intraday).
The Chart: (Click to view the chart)
THIS WEEK
Intel’s ‘roaring’ mid-quarter report had its day Friday, and it could not break the indexes over near term resistance. With the 9-11 anniversary this week we anticipate resistance will hold and the market will move nervously and below near support. The Nasdaq is testing its recent downtrend, and after this tepid move back up to the 10 day MVA (and perhaps the 18 day MVA) we anticipate the support from the SOX will be gone after the Intel flurry, and it will head lower to re-test 1250 or lower.
Friday held promise, but it was empty as very few stocks moved on any significant volume. We saw several moves but just could not get interested in many upside plays as the indexes stalled at resistance and many individual stocks did the same. The market is nervous but not so much that it rolls over and dives lower. We anticipate a continued downtrend on that nervousness, but not a steady plunge; more down then bounce, down then bounce. The key will be the break below the recent support levels, but we anticipate playing the Nasdaq down from this near term resistance tested Friday.
Given the circumstances in the world, the market action is not bad at all. As we have noted before, after the strong volume surge in the July selling, this calm rather orderly pullback (at least with respect to volume) on lower trade is more in line with historic bottoms that come when no one is looking. There is certainly enough gloom about the economy even with the employment numbers, anxiety regarding 9-11, and the impending war effort in the Middle East. On top of that is general investor disdain for stocks (the real estate special on CNBC epitomizes this along with the headlong rush to bonds we will discuss this week). It is a good environment for a quiet bottom though on any war effort the market typically falls rather precipitously at first.
Once the uncertainty is removed with respect to 9-11 there will be relief. At that point buy side volume may come back and really lift the rally. What we would like to see is selling down near the July lows before then on continued light volume. Until then we will play the downside bias and wait to see if there is strong buy side volume after a test along with a follow through and then breakouts from leading stocks. For now the majority of the best patterns are found with regional banks and savings and loans; while financials are an important component to any rally, this is not an inspiring leadership group as they are gaining mostly due to the low interest rate environment. There needs to be new leadership from new sources based on solid earnings and sales. Right now no group or groups are showing this kind of leadership; it is more individual stocks scattered through the market.; that remains one of the key drawbacks to any recovery.
Support and Resistance
Nasdaq: Closed at 1295.30
- Resistance: 1300 is price resistance. The 10 day MVA (1308.23) followed by 1316, an early August interim high. Then the 18 day MVA (1319.99). The late July high (1354.48) and 1357.09, the October 1998 bear market low. The March/May downtrend line at 1360. The 50 day MVA (1365.10). 1418, the interim test after the September low. There is another downtrend line from the March and May highs at 1430. That is followed by price resistance at 1500.
- Support: 1260 may provide some support from recent lows. Then the July lows at 1240 to 1230. Price support from 1190 to 1200 (the July intraday low is 1192.42).
S&P 500: Closed at 893.92
- Resistance: The March downtrend line at 898 and price resistance at 900. The 10 day MVA (904.87) and the 18 day MVA (909.43). The top of the wedge at 911.64. The 50 day MVA (927.72). The July up trendline at 939. The September 2000/May 2001 downtrend line at 938 followed by 950. The next downtrend lines from March and April highs at 958. 965, the September 2001 closing low. Then 1000 is psychological resistance.
- Support: 875 continues to provide a rest stop for the index. Then 850 to 855 has previously held (the October 1997 and Q2 1998 lows). The lowest channel line in the March downtrend channel (825). 800 is next. Then the July low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8427.20
- Resistance: 8500 is some resistance. The March down trendline at 8545. The 10 day MVA (8546.24). The 18 day MVA (8607.54). The late July high that is the top of the ascending wedge at 8762.14 (8745 closing). The July uptrend line now at 8878. The 50 day MVA (8783.77). 9000 is key on up to 9050. A range of resistance from 9000 to 9500, but specifically 9250 and then 9500.
- Support: 8250 continues to act as some price support down to the September closing low at 8235.81. The lowest bottom channel line of the March downtrend (8130). 8062, the September 2001 intraday low, has tried to hold on a couple of occasions. Then the July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
9-09-02
- Wholesale inventories, July (10:00): 0.2% expected, 0.3% prior.
- Consumer Credit, July (2:00): $9.2B expected, $8.4B prior.
9-11-02
- Fed Beige Book
9-12-02
- Initial jobless claims (8:30): 400Kexpected, 403K prior.
- Export and Import prices, August (8:30)
- Current Account Q2 (8:30): -$125.0B expected, -$112.5B prior.
9-13-02
- Retail sales, August (8:30): 0.4% expected, 1.2% prior.
- Retail ex-Autos (8:30): 0.2% expected, 0.2% prior.
- PPI, August (8:30): 0.2% expected, -02% prior.
- Core PPI (8:30): 0.1% expected, -0.3% prior.
- Michigan Sentiment preliminary, September (9:45): 87.9 expected, 87.6 prior.
SUBSCRIBER QUESTIONS
Q: Can you perhaps give your opinion on the defense stocks before 9/11. eg. INVN, OSIS, LLL. Do you think it is a good idea to buy them before? Thank you.
A: In general some of the specialized defense stocks such as those you mentioned made moves Friday, but they have not rallied much in anticipation of 9-11 or on the war indications regarding Iraq. OSIS and LLL made solid moves Friday (LLL broke over its 200 day MVA on rising volume) and could easily continue their move up into Wednesday, making good trades. Longer term their patterns are not that great. INVN is interesting in that it has pulled back to the 10 day MVA over the past week in a lateral consolidation, showing a doji Friday on the 10 day MVA. It too is in position to make a move up this week out of this consolidation. The play is on the anxiety of the event; of course we all hope that nothing does happen that would shoot them higher. |
