InvestmentHouse Weekend Update:
investmenthouse.com
- Jobs report gives market a reason to take a breather.
- Jobs weak as expected but unemployment falls to pre-9/11 levels
- Don’t forget US entrepreneurship.
- ISM Services falls below expectations as well.
- Techs lead up, techs lead down. At least volume was lighter.
- Reality check coming as oil keeps rising and Greenspan speaks twice, ready to rebut idea Fed is nearly done.
Huge week of data helps stocks rally but then starts a pullback on Friday.
What a week of data, and it was not limited to just the government reports. There was plenty from the Feds with the ISM, factory orders, consumer confidence, and the jobs report. That, however, was just part of the news. Oil climbed back into the mid-fifties. France and the Netherlands voted down the EU constitution. That spurred the dollar and continued the bond rally, further flattening the yield curve. Then the Dallas Fed president candidly spoke about where the Fed was in its rate hiking that further sparked the rally in stocks and bonds, and it steepened the yield curve as the 2 year rallied faster than the 10 year.
The flood of data, the possibilities it generated, and the rally it helped further left stocks spent by Friday. The prospect of the Fed being closer to done than somewhere in the middle of a prolonged rate hike spree gave stocks another good push higher mid-week. SP500 pushed above 1200 and NASDAQ rallied within 2 points of 2100. Those are key resistance points, and after a steady and sustained rally they were likely to cause some sort of pause. Friday stocks did just that.
You could blame the weaker than expected non-farm payroll data for the selling, but let’s face it, stocks had run a long way, they got an almost euphoric-like boost midweek (we heard the Fisher rally session referred to as nirvana), and were at resistance. The jobs data was used as an excuse to sell and lock in some gains. Long run, low overall volume, oil back up to $55/bbl, questions about just what the Fed is going to do (Friday Fed governor Gramlich said he had no idea what inning the Fed was in), NASDAQ at resistance, and a weekend ahead. Time to sell and lock in some gain, and that is what investors did.
It was not a rout. The leaders on the way up were the downside leaders Friday. In other words NASDAQ and SOX led the move lower. That is typical. They held near support and volume was lower. That is good. After NASDAQ showed some better volume the past few sessions the lower volume selling was good to see. It shows that there was more buy side volume coming into technology on the upside and when the buyers paused the sellers did not rush in to fill the void. Leaders fell back to near support on lighter trade as they continue to trend higher. The point loss was more than you want to see on the indices, but the action remains positive for now as NASDAQ, SP500, SP600 and SOX continue their move up the 10 day EMA. Now they need to turn stingy with the gains once more, consolidate below this resistance, and prepare for the next attempt to break through.
THE ECONOMY
Jobs fall short as weekly claims foretold, wage costs rise.
Non-farm payrolls were a disappointing and anemic 78K, fulfilling what the weekly jobless claims were telling us. That was the lowest monthly production since August 2003. Traditional jobs did not ramp up as the economy surged in 2003 and 2004 as companies found it more economical after the bust to outsource, offshore, and invest in productivity enhancing technology. Having been seriously burned in the last bust, employers remain conservative and are keeping overhead lower and competing better on the world stage by using technology over bodies, productivity over people. That has kept traditional jobs growing at a mediocre pace during the recovery. Now that things are slowing, something not unusual in the third year of a recovery, jobs growth is not going to rocket higher.
It was hard to find much in the report that would lead the Fed to feel any additional pressure to raise rates. Hours worked held steady at 33.8. The service sector, a leading jobs sector in the economy, slowed hiring to 64K from 232K in April. When the leading sector shows a 70% drop in hiring it is hard to call the economy too hot. Some will point to wage hikes under the theory that higher wages lead to runaway spending and thus inflation due to higher demand. ‘Wage-led’ inflation was a Fed favorite in 1999 and 2000, and they used that as one of its indicators of inflation to hike rates. It never showed and the Fed made sure it did not when it managed to crash the economy. In any event, Q1 unit labor costs rose 4.3% year over year, the largest gain in years. A lot of that, however, was due to paying up pensions and paying for healthcare because it is not showing up in the 0.2% gain in hourly wages. Wages are up 2.6% year over year, not even keeping up with inflation. How can wages push inflation when they are not keeping up with it?
No, even if you buy the Fed’s dubious inflation indicators hatched back in 1999, the jobs report gives the Fed nothing to prolong this campaign beyond a couple more rate hikes. Of course that requires the Fed to actually hold to the rules, and when the Fed has its mind on where it wants to go as opposed to what it does to the economy in getting there, facts don’t matter. We predicted this early in the campaign, and the Fed is currently holding to its non-Fisher mantra that the economy is strong and indefinite rate hikes are necessary.
Don’t fence in US entrepreneurship.
There were some decent signs in the jobs report, but to call them anything more than side dressing would be a stretch. The monthly average in 2005 is 180K, not quite the 183K/month in a good 2004, but not a big difference. No major drop off, but employment is a lagging indicator, and with the economy slowing its growth path we don’t expect jobs to ramp up much. Another good indication is the overall unemployment rate dropping unexpectedly to 5.1% from 5.2%. Once more the household survey shows good growth, this time 376K jobs. That is not unusual for a recovery after a major economic bust that changes the way companies do business (translated: that saw thousands of companies go under and exposed how the survivors had to compete with cheaper foreign labor markets); the need for work sparks typical American ingenuity. Lot’s more self employed and contract workers are now out there by necessity because the big companies are still downsizing to maximize their profits as their growth slows and the small companies have not grown to the point where they require a lot of new employees.
In short the recovery and new companies driving the new ideas have not hit the stage where these upstarts are big enough to really start generating a lot of new traditional jobs. The irony of this is how we moan and gripe about traditional jobs, but the US’ strength is in its entrepreneurship. That is what separates us from practically every other country and economy. Our mostly free enterprise system (regulation still stifles much of our real economic power) rewards ideas, invention and follow through. From garages in what was to be called Silicon Valley and deep in the heart of Texas the technology revolution began and changed all our lives. That was no isolated event. Light bulbs, the telephone, airplanes, vacuum tubes, the cotton gin, innumerable health care innovations -- the list of life changing inventions is endless and many came from at the time obscure, little known sources and spawned a generation of high quality jobs.
While it is tough to deal with the transition from massive technology job creation to massive layoffs to the next wave of new jobs spawned by new invention, we should not become too impatient and be tempted to try to regulate our way out or create federal programs along the lines of Japan. We are at our best when the government lowers regulation, lowers the cost of risk taking, and creates an environment where a person with an idea is encouraged to take it from the brain to the production line. You do that with low taxes, minimal regulation, and free markets
ISM Services gives even less reason to fear prosperity.
The service sector in the jobs report was much weaker, and that was echoed somewhat in the services survey that fell to 58.5 from 61.7 in April and below forecasts of an even 60. Jobs were flat (53.4), new orders were up (59.7 from 58.8), and prices paid were down (57.9 from 61.9). It was not a bad report at all, but the strongest sector in the economy with respect to jobs is slowing as well.
Another slow patch already?
The economy certainly didn’t instill a lot of confidence it was roaring back. The data has been up and down the past two months. Factory orders strong and consumer confidence coming back. Then there is the ISM falling sharply, jobs languishing. Is this another slow spot? So soon? The Fed pronounced us out of the Q1 soft patch just a few weeks back and now the indicators are slowing once more. This time the Fed does not seem to be biting on the ‘soft patch’ bait, at least not yet. The Fed wants to stick to the plan to get rates up near 4%, and if it acknowledges the wobbly economy results it won’t get there, or at least it will be cursed even a bit more than usual. This time we won’t hear about any soft patch or slow down until it gets where it wants to go with rates or there is a major economic meltdown.
With oil prices moving back to $55/bbl the idea of a continued slowdown is not far-fetched. We believe that despite copper hitting a new all-time high last week that in general the world economy is slowing once more. Sure China, India and Brazil are solid along with the US, but they are the finite exception to the general global economic climate. Oil is throwing gas on the fire so to speak. While the market originally cheered the news that the Fed was close to being through, the thought of a slowing economy due to high oil prices trumps the possibility the Fed is winding down. Slowing because of high oil prices and in addition to some extra Fed rate hikes does not induce lasting buying in stocks.
THE MARKET
It was a week that saw technology solidify its leadership role in this rally, and it also saw the continued re-emergence of the small caps as a market force. Many have called for the large caps to lead the market higher at this stage of the recovery, but as we have seen, the market has struggled to move higher when techs and small caps struggled and the large caps were in the lead. SP500 tried to lead in the first of the year and was on the verge of s good move, but it collapsed. NASDAQ had spent the year basing, and after the selling that took SP500 down it was ready to make its break higher. It has led ever since.
Friday did not change anything with respect to the move off the April low. Since that low leading stocks have pointed the way higher and the indices have followed, working up the 10 day EMA and popping resistance levels along the way. A run up the 10 day EMA is a strong run, and as we know with individual stocks, it cannot last forever. Eventually a stock gets too far above its 200 day MA or runs into key resistance and has to take a breather or make a deeper test. In the case of the indexes right now the 200 day SMA is not the problem. They have rallied well, have broken some resistance along the way, and are now at some key resistance.
The leader NASDAQ, because it has moved so well, is facing important resistance, and we feel that will force some consolidation here. Remember, while NASDAQ volume has been better than the others with respect to price/volume action (up on up days, down on down days) and has shown solid surges on key days, overall trade was low even before summer officially started. That typically means a rest pause when an important resistance level is met, and if the economy is weakening or there is something else changing the reason for the rally, that can mean something worse than just a rest period. Perhaps a maturing expansion, a Fed that will refute it is near done, and oil back at $55/bbl could cause that?
We like how volume picked up on NASDAQ as it rallied up to 2100, finally garnering some back to back above average volume. More volume on the upside is always good, but we have to take this with some caution: volume can also accompany an approach to a top as those who have held off say ‘what the heck’ and move in, fearing they are missing out on the move. They rush in as the index approaches resistance, and the smart money uses the new buyers as cover to exit.
That is why we liked that volume backed off Friday on NASDAQ after it rallied Wednesday and Thursday. That showed the sellers were not really piling in. Moreover, there was not a lot of higher volume selling among leaders either. As always it deserves further monitoring as NASDAQ and the other indices make this pullback at important resistance. It is time for a rest, and the six-point resistance on NASDAQ (2100 hit six times since December) suggests it is going to take it.
MARKET SENTIMENT
Bulls versus Bears:
Bulls rose for the third week, moving up to 47.8% from 46.7%. A much bigger jump from the prior week (46.2%). Bulls bottomed in early May at 43.5%. Still below the 55% level that is considered bearish.
Bears dropped sharply again, falling to 25% from 26.1% (28.6% the week before). A sharp drop after hitting 30.4% on the high in early May. That was the highest bearish level since August 2004. Still above the 20% level that is considered bearish.
Short Interest:
NYSE short interest is rising the past few weeks. After flat lining at 5 to 5.5 from November to earl May, it took off the past 4 weeks and has broken out of that range. It is approaching the July 2004 high (just before the rally started on NASDAQ that led to the end of the year) and the big spike in September and October as the year end rally took off on SP500. Despite the rise in the market, the rising short interest is a positive sign for continued strength in the market.
VIX: 12.15; +0.31
VXN: 15.59; +0.64
VXO: 11.56; +0.21
Put/Call Ratio (CBOE): 0.99; +0.09. The ratio was strong again for the second session. Thursday we noted that more speculative puts were being sold, i.e. betting on further price gains that would push the price of the put lower. You sell it high (when the stock price is low) and then buy it back low (when the stock price rises). This has the same indicator characteristics as buying calls. It shows some excess speculation. Friday the ratio moved higher as the market sold, more typical action that you would expect. Why? Because a lot of those that just sold puts betting things were going higher were eating them Friday as stocks fell back on them.
NASDAQ
NASDAQ gapped lower and never really came back as a midday consolidation attempt waffled and fell apart in the last hour.
Stats: -26.37 points (-1.26%) to close at 2071.43
Volume: 1.678B (-7.59%). Significant drop off in volume Friday as NASDAQ sold back. Trade fell to below average as it faded after two stronger, above average volume sessions propelled the index higher on the ‘Fisher’ rally.
Up Volume: 381M (-760M)
Down Volume: 1.225B (+570M)
A/D and Hi/Lo: Decliners led 1.73 to 1. The upside A/D line was never really that strong on the way up, and the downside breadth was just about as solid. You want to see that
Previous Session: Advancers led 1.13 to 1
New Highs: 83 (-15)
New Lows: 28 (-13)
The Chart: (Click to view the chart)
Gapped lower and sold all session, retreating from 2100 once more after approaching that level on the Thursday close. NASDAQ has now hit 2100 on the upside and downside at 7 times in the past six months. This move is not necessarily a failure at this point: a tap at resistance after a run and now a lower volume pullback. As long as NASDAQ holds most of its gains at near support, consolidating on overall low volume, it is setting up for another move at that resistance. Near support is the 10 day EMA (2064) and 2051. Thursday the 50 day EMA crossed up through the 200 day SMA. That is a sign of continued upside, but it also typically results in a test, and with the Friday pullback from resistance that looks likely.
NASDAQ 100 led the selling with a 1.6% drop, tapping all the way down to the 10 day EMA (1540) on the low. That pushes it back below the key 1550 level, but with the lighter volume it is thus far not a real threat to the move higher.
SOX found resistance at 440 the next stall point but still below the stop of the seven month range at 450. SOX struggled with NASDAQ, but that is the way it works: they lead upside, they lead downside.
SP500/NYSE
The large caps have struggled to keep pace with NASDAQ, not showing great price/volume action. Friday they dumped lower; at least volume was lower.
Stats: -8.27 points (-0.69%) to close at 1196.02
NYSE Volume: 1.287B (-8.27%). Volume had climbed some to end May and start June, but it was still below average, not showing a lot of power. At least the Friday selling saw lower volume as SP500 continues to move up the 10 day EMA.
Up Volume: 562M (-437M)
Down Volume: 1.039B (+264M)
A/D and Hi/Lo: Decliners led 1.27 to 1. Quite modest downside breadth as the small caps and mid-caps were the relative leaders in the session.
Previous Session: Advancers led 1.48 to 1
New Highs: 198 (+11)
New Lows: 24 (+5)
The Chart: (Click to view the chart)
It has not been a pretty move for SP500 though it has been effective. It made a higher high the last two weeks of May, and it has managed to continue moving up the 10 day EMA (1194) since, using that near term support as, well, support. It is back at that level now on lower volume Friday. The entire move has been on lower volume, however, and the price/volume action has not been that great. It is following NASDAQ’s lead at this point as it struggles around its own resistance level at 1200, giving back that point Friday.
After breaking above the April highs (324.64 intraday) and resuming some leadership status, it is now testing the move as well. It is well above the 10 day EMA (322.49), and it will likely test that on this pullback. That means it gives up the April intraday high but close to the April closing high (322.65). All in all SP600 stands in good shape into this pullback as it and the mid-caps are quietly leading the moves upside as well as showing relative strength on the downside days.
DJ30
The Dow struggled again as the large caps are finding tough going even as the sages of the financial shows are saying buy large caps. We are not against them per se; if there is a good one we will look at it. In any event DJ30 dumped back down in its current two week lateral move, holding the 18 day EMA (10,444) on the Friday low. Volume jumped higher as it did sell, however. Still below average but the Dow’s diversity is its downfall the past several months as different sectors hit it hard.
Stats: -92.52 points (-0.88%) to close at 10460.97
Volume: 222 million shares versus 187 million shares Thursday.
The Chart: (Click to view the chart)
MONDAY
Stocks get back to a full week of action after the weeks sandwiched around the Memorial Day holiday. The week opens seeing the indices falling Friday on some disappointment with economic data, higher oil prices, the Fed trying some damage control, and NASDAQ at resistance. All of that was a good excuse for investors to sell some ahead of the weekend.
One of the concerns this week is just what the Fed will say to ‘take back’ Dallas Fed president Fisher’s comments about the eight inning in Fed rate hikes. Bonds were rallying sharply again Friday when Fed governor Gramlich stated he had no idea what inning the Fed was in (isn’t that just like a Fed official, i.e. has no idea how the game is going?). At almost the same time it was announced that Greenspan would be speaking Monday evening as well as on Thursday. That was enough to reverse bonds in their tracks and the rally turned over and the yield curve flattened all in one move. That simply shows how much weight the Fed is exerting on the market and the economy. Without the Fed the bond market yield curve is just fine. With the Fed it is basically moving to flat and then inverted, in keeping with the Fed’s track record.
That is a lot for the market to sweat this week and it is something of a reality check for the move to this point. Is it coincidence that it is occurring at a point where NASDAQ is probing important resistance? Probably not. The market tends to anticipate events and hit inflection points when those events come to a head. 2100 is a logical point for NASDAQ to take a breather on this move, chew on the issues confronting it, and then make a move higher if it continues to view them as positive.
That may take some doing. The Fed tends to overdo it, but looking at the Fed Funds futures, 50 basis points is anticipated and is not a knockout to the economy. Another 25 on top of that is still a possibility, putting the rate at 3.75%. That is perhaps survivable. 4% is not anticipated, and that would start a serious problem. The market started this move under the guise the Fed was almost done, something that it did in late 2004 and turned out to be wrong. The Fed is going to do some talking this week and take back some of what Fisher said. It is up to the market to decide who is talking the truth; it sure sounded as if Fisher was the straight shooter, ‘rookie’ or not.
While the market may still come out on the positive side with respect to its view of further Fed rate hikes, oil is not going away. It is right back in the mix with a $55.04/bbl close, surging almost $10 in just over a week. It showed how touchy it remains with one week’s inventory data and a transient health scare for the Saudi king. Overall the world economies are slowing with some in downright recessions, but with China, India and the US still slurping up the crude, it is finding continued bids. One of the pressures on oil is that China is continually seeking to gain new supply, actively competing for traditional US suppliers. That is keeping it a sellers market for oil, and that is keeping the pressure on oil prices and thus industrialized economies.
Thus the market is still dealing with the same 1-2 punch that it started the year struggling with: the Fed and oil. This week may give more insight as to the Fed, but it is likely to be insight the market does not want. We think that will cause some added pressure on stocks, keeping them in a consolidation mode as opposed to a one day pullback. Ultimately we still think the market will take a positive tack on this. Oil is one that is the problem as it just won’t die. It will need to start a decline before stocks will be ready to resume. That means some consolidation this week while oil peaks on this run and then starts sliding back. That will be what allows this market to take a breather, shake out some sellers, and then start the next move higher. As always we will watch volume on the indices and how the leaders test near support and rebound.
Support and Resistance
NASDAQ: Closed at 2071.43
Resistance:
2100 is a key resistance point.
2151, the early December closing high.
2163, the mid-December closing high.
Support:
The 10 day EMA at 2064
2051 from February, March price points is still trying to hold.
The 18 day EMA at 2042
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 50 day EMA at 2014
The 200 day SMA at 2011
S&P 500: Closed at 1196.02
Resistance:
Price levels at 1200
The March 2003 up trendline at 1212
The February intraday high at 1212.
December high at 1217.
The March 2005 high at 1229.11
Support:
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 10 day EMA at 1194 and the 18 day EMA at 1188
The early May high at 1178.
1175 second high in that double top that spanned late 2001 and early 2002
The 50 day EMA at 1180
The 200 day SMA at 1166
1164 is the January/March neckline to the head and shoulders pattern.
Dow: Closed at 10,460.97
Resistance:
The April high at 10,557
Price consolidation at 10,600
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The 18 day EMA at 10,444
The 200 day SMA at 10,420
The 50 day SMA at 10,420
The May high at 10,406
10,400, the bottom of the November/December range
The recent April highs at 10,264
10,065 from March 2004 lows.
10,000 the recent lows.
9988 from September 2004.
9933 to 9900
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
June 07
- Consumer Credit, April (3:00): $6.8B expected and $5.5B prior
June 08
- Wholesale Inventories, April (10:00): 0.4% expected and 0.4% prior
June 09
- Initial Jobless Claims, 06/04 (08:30): 350K prior
June 10
- Export Prices ex-ag., May (08:30): 0.5% prior
- Import Prices ex-oil, May (08:30): 0.4% prior
- Trade Balance, April (08:30): -$58.0B expected and -$55.0B prior
- Treasury Budget, May (2:00): -$47.0B expected and -$62.5B prior |
