InvestmentHouse Weekend Update:
investmenthouse.com
- Very nice consolidation continues as indices, leading stocks set up for the next move higher.
- Core PPI barely inches higher as energy yet to make the crossover.
- December retail sales rise less than expected but November revision more than doubles earlier report.
- China’s present love affair with US treasuries and the flat yield curve.
- Getting ready for the next move higher and trying to avoid minefields.
Nice easy pullback leads into a 3-day weekend.
There was not much buying enthusiasm Friday nor was there much selling. The market slowed down ahead of a 3-day weekend with not many wanting to get too long with the Iran situation. Stocks continued the Thursday weakness early in the day but Friday was not the same one-sided action (namely down) that Thursday showed. The major indices were up and down all session making two down runs and two upside runs. The last move was up, and it took NASDAQ, SP500 and SP600 positive by a hair. If the bell closed 30 minutes later it would likely have been down. It was that kind of day.
There was not a lot of power behind the moves either way, and given the market is in a consolidation phase that is good. Volume was lower, moving back to average on NASDAQ and NYSE, showing no sellers or buyers in any number. Breadth was modest as well (+1.2:1 on NYSE, NASD), and the fact it was positive on a mixed session is also a positive market indication on the day. SP500 tapped at the 10 day EMA on the low, its nearest support, and rebounded, good intraday price action. That was mirrored by many strong leaders such as BRL, CLE, DAKT, MRVL, SNDK, STJ, WIRE as they ease back on lighter volume to set up the next run.
This is great action that is working to set up the next upside move, and we like that the market is overlooking other issues and is just going about its business. For instance, earnings continue to be an overall disappointment early in the season, but the market is not too concerned about the reports (thus far at least) of what it considers a few laggards (e.g. AA). There is also the continuing climb in oil, fostered of late by the tensions regarding Iran. It was lower Friday, but still uncomfortably comfortable in the lower sixties. As we discussed the past week, that won’t be good for the economy when we move into the summer and gasoline hits $3/gallon early on and then pushes to $4 when a big storm moves into the gulf. For now, however, the market is ignoring this rather nasty possibility, and we are more than happy to play along with it as it disregards this issue.
THE ECONOMY
PPI rebounds as energy rises, but core still shows no pass through.
Producer prices jumped 0.9% (0.4% expected and 0.7% prior) on the back of the resurgence in oil prices (+3.1%). That puts energy prices up 24% year/year. Food prices by comparison are up just 1.4% year/year. The core (less food and energy), however, posted just a 0.1% rise, less than the 0.2% expected and in line with the 0.1% from November. That leaves core PPI at 1.7% year over year, the lowest since June 2004 and well off the 2.8% peak in August 2005.
That leaves the major concern of the time unresolved: which will make the crossover first, the bird flu with human to human transmission or energy prices to core prices? This is the debate voiced for the past year with respect to energy prices and other areas of the economy. The core suggests that has not happened though it threatened to do so mid-2005. Some talk of this as an inevitability, but back in 1994 that did not happen despite a sharp rise in prices in that year. The Fed hiked rates to fight off inflation, but it never
Materialized before, during or after. Did the Fed forestall inflation or just stall the market for a year? The debate still continues on that one, but we are seeing a similar action here with the market moving sideways while the Fed tightened for two years, no pass through of higher energy into other areas, and now the market starting to rally as the Fed announces it is ending its campaign.
So far so good. Natural gas has faded back just below $9BCF, still high but well off the almost $15BCF reached just a month ago. Oil, however, has resumed its climb, and though helped by the Iran story, it tenaciously held on (once again) when it threatened to break down. Demand shot higher in December, keeping the pressure on price as well. If we don’t get a reprise ahead of summer energy will be even higher and the longer it stays at an elevated price an economic impact will result. It did not impact the economy at $35, $40, $45, $50 and thus far even $60/bbl. At some price point the economy will balk, particularly when gasoline gets back to $3/gallon or better. As seen in the fall, when gasoline topped $3 the consumer started changing consumption habits, moving to discounters. If prices had continued high the impact would have been more than just fleeting as it turned out.
December retail sales lower than anticipated, but November turns an even bigger month.
Sales rose 0.7%, less than the 1% anticipated. Still solid, and when you consider November was revised to 0.8% from 0.3%, the holiday shopping season turned out pretty well. Just pretty well, however. Auto sales rose 2.6% as expected, and that means other areas lagged. Indeed ex-autos sales rose just 0.2% versus the 0.4% expected and the 0.4% in November (revised from 0.3%).
The Q4 average less autos was 0.2%, a fairly weak number. If you ex out autos and gasoline, the rise was just 0.1%. Given the holiday season, this weakness was surprising and shows the impact of those high gasoline prices discussed above. Retailers were able to sell products, but the cost of discounting appears to have eaten into sales dollars. Again, if gasoline climbs to $3/gallon again, something we think will happen in early summer if Middle East tensions do not ease, we are going to see more consumption impacts.
China continues to buy US treasuries, but for how long?
Last week we discussed the US trade deficit and the problems petro-dollars are creating when they are cycled back into the US. The problem is that they keep coming in and to a certain extent are depressing US bond prices as the money is used to purchase treasuries. The fear some express is at some point the oil exporters will quit doing that, causing US rates to rise when the buying stops as well as when those dollars are sold elsewhere for assets denominated by another currency. The extra dollars ‘coming home’ from those divestitures will be inflationary, further pressuring treasuries.
China was again a topic of discussion late in the week as many speculated what its role would be with respect to the tensions with Iran. China has been scouring the globe in search of additional reserves to purchase, and has been willing to deal with anyone in any place in order to obtain the supply of crude it desires. It has dealing with Iran, and thus what China’s position will be is the subject of a lot of speculation.
China was also on the news front because it indicated last week that it might be interested in seeking diversification outside of US dollars and treasuries. That too sparked the debate about what happens if China decides to go elsewhere. What are the odds it will do that anytime soon?
The past year China’s GDP growth has averaged an impressive 7%. Take out its exports, however, and GDP growth is 3%, below the US’ overall reading near 4%. Also, the US is a net debtor with respect to trade, and if you ex out the trade figures so as to compare apples to apples, US growth jumps to well over 5%.
The bulk of China’s exports go to the US, and most of the imports are inexpensive goods that China’s cheap labor force can make for less than most other places. Many of these goods are sold in the discount stores and other lower priced retailers where consumers with limited disposable income shop. Interest rates, while important to all strata of society, are very important to the lower socioeconomic levels. If interest rates rise substantially, the purchasing power of the classes buying the Chinese goods diminishes.
Thus right now it is very much in China’s interest to continue buying US treasuries and helping maintain lower US interest rates. The Fed helped China out by leaving rates so low for so long, but even as the Fed has attempted to raise rates on the short end, all rate levels remain low and thus the flat yield curve. In conjunction with the petro-dollars and the Chinese trade surplus dollars, quite a bit of downward pressure is being exerted on US interest rates, making it difficult to discern just how much of the flattening is due to a slowing US economy in the future and how much is due to massive treasury purchases.
At some point when China’s populace becomes wealthy enough (more and more are returning home after their foreign educations to enjoy much stronger buying power) it will start buying those goods made at home. China’s trade surplus will start to diminish, and it will have less and less incentive to buy US treasuries to help keep US rates low. It will still want to sell goods to the US, but it won’t be as imperative for it to sell the lion’s share as it does now. At that point the US will face that problem of more dollars coming home, but it will also have a more balanced trade picture itself due to China’s change in its demographics and socioeconomic makeup.
THE MARKET
MARKET SENTIMENT
Sentiment remains at what are typically considered extreme levels with respect to bullish and bearish advisors. Despite this indication the market has continued higher on strong volume and strong leadership. That is one reason we don’t use sentiment indicators as the basis for our investing. They are indicators, but secondary to the real nuts and bolts of market movements, i.e. price/volume action and leadership.
VIX: 11.23; +0.03
VXN: 15.92; -0.32
VXO: 11.07; -0.13
Put/Call Ratio (CBOE): 0.78; +0.04
Bulls versus Bears:
Bulls: 56.8%. After a week that finally saw bulls fade from 60.4% (55.7% last week), bullish advisors turned back up. Not surprising given the strong market move. Still over the 55% level considered extreme. This, as with VIX, is an indication and not a fact of market direction. Too strong, but the strength in price/volume action and leaders is outweighing this sentiment indication. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.1%. Down from 23.7% the prior week where bears spiked up to from 20.88%. Still in decent shape, acting as something of a counterbalance to the excess number of bulls. 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: +0.35 points (+0.02%) to close at 2317.04
Volume: 1.786B (-13.37%). Volume faded on the selling, moving back down to average for the first time in 2006. Low pre-holiday volume, but regardless of the cause it was very good action as the index tested lower and then rebounded to close basically flat. Excellent price/volume action on this rally and now the test of that strong move.
Up Volume: 930M (+102M)
Down Volume: 811M (-400M). Evenly matched, a further indication there was no dumping of shares on the dip.
A/D and Hi/Lo: Advancers led 1.25 to 1. Not bad action at all given that NASDAQ was negative from mid-morning until the close. Breadth, despite NASDAQ’s leadership in this rally, has still lagged. Not fatal, but not out and out strength.
Previous Session: Decliners led 1.56 to 1
New Highs: 128 (-54)
New Lows: 23 (+5)
The Chart: (Click to view the chart)
NASDAQ dipped lower again, holding well above any near support level (the 10 day EMA is all the way down at 2296.84), tapping 2308 on the low and rebounding to close flat. Lower, average volume, flat breadth, easily holding above support. The candlestick chart showed a doji, and that can indicate a bounce back after some selling. Given the move was so brief, however, we still anticipate some more softness this week. Many strong NASDAQ stocks, however, are already at the point of rebound after modest pullbacks to test their moves (e.g. FLSH, MRVL, MSTR, WFR, TALX). We expect leaders to lead, that is move out ahead of the rest of the market. Thus we could see several stocks start higher this week ahead of the overall market.
SOX (-0.50%) was the laggard, but it was also down nearly 1% on the lows before it too recovered in the afternoon rebound. SOX reached down toward the 10 day EMA (517.56) on the low (520.76) and recouped three-fourths of its session losses as it too showed a doji on the candlestick chart. As with NASDAQ, we don’t think it is done with the test and will likely fully test the 10 day EMA and even a bit beyond before it is ready to resume the move. With this market, however, we want to be ready to move when these stocks start back up; they have been leaders in the rally.
SP500/NYSE
Stats: +1.55 points (+0.12%) to close at 1287.61
NYSE Volume: 2.208B (+29.79%). Low, average volume, the lowest of the year, as SP500 tapped at the 10 day EMA and rebounded for a modest gain. Excellent price/volume action this year, and this test is a continuation of that great action that shows accumulation still ongoing.
A/D and Hi/Lo: Advancers led 1.24 to 1. Modest, matching the gains in the session.
Previous Session: Decliners led 1.72 to 1
New Highs: 125 (-89)
New Lows: 21 (-8)
The Chart: (Click to view the chart)
The large caps led the December move, but they were a bit late to the most recent party this year. Still they did breakout on strong trade, joining the rest of the indices. Now they are ahead in making the test, tapping right at the 10 day EMA (1281.60) on the Friday low (1282.78) and rebounding to post a modest gain. Very solid action that works to shake out the profit takers and set up the next move higher. Expecting a bit more of a test and then a continued rally. Best looking action in the market as far as the pullback.
SP600 (+0.08%) is looking quite tasty as well. It started to pull back Wednesday and continued through Friday morning. Then it found support with the rest of the market and rebounded for a modest gain Friday. Still well above support at the 10 day EMA (363.48; closed at 366.62). We thought it might come back to even the 18 day EMA (360.89), but that looks less likely now given the strength the small caps are showing.
DJ30
Nice tight doji with tail Friday, tapping at the 18 day EMA (10,905) on the low and then rebounding to close above the 10 day EMA (10,942). That keeps it right at the breakout point though still slightly below the March 2005 high at 10,984. Looks very good as well as the NYSE indices appear more or less primed to move higher from here.
Stats: -2.49 points (-0.02%) to close at 10959.87
Volume: 209M shares Friday versus 244M shares Thursday. Good low, below average volume on the test showing no selling.
The Chart: (Click to view the chart)
TUESDAY
Tensions with Iran and correspondingly higher oil prices will still be on the horizon, earnings reports will start coming fast, and the CPI is out Wednesday. There are some regional manufacturing reports, capacity and utilization, and Michigan sentiment Friday. Earnings will be the key driver, and once again the outlook will be the key. Stocks rallied ahead of earnings and started to give back some of the gains right ahead of the results. SP500, SP600 and even DJ30 already look to be in position to continue the upside move. NASDAQ and SOX, the big gainers in the rally, may need a bit more time.
As noted above, however, there are stocks that have already eased back to support and are in position to continue higher. They may still take another session or two, but if the market remains in its current accumulation phase they will be ready to move this week. Indeed, some of them will be heading out ahead of the pack as leaders typically do, and we want to scoop them up as they start higher.
The market is setting up for a move higher to continue the rally, but it still has to step through the minefields out there such as oil and Iran and earnings and even the Fed, and any of those could trip it up. Thus far the market has its head down and is bent on the rally, ignoring the potential problems that are very apparent. Of course, they are always apparent; the market either ignores them or not, and now it is in the ignore mode.
A week ago we said the past week was like a new year all over given the strength of the first week of 2006 and the new money that went into the market. It continued last week and then tapered, but it was a healthy taper. Now once again we will see if the big money comes back in ready to accumulate more shares as the earnings results move from expectation to reality. Given the set up we are seeing in the indices and the individual stocks we remain positive on the prospects of a further move higher and more money moving into and rotating around the market.
Support and Resistance
NASDAQ: Closed at 2317.04
Resistance:
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2296.84
2288 from December 2000 low.
The 18 day EMA at 2279
2278 is December 2005 intraday high.
2251 is the January 2001 low
The 50 day EMA at 2237.64
2220 (2218 intraday) is the August high
S&P 500: Closed at 1287.61
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1281
The recent highs at 1275
The 18 day EMA at 1275
1264 from the December 2000 lows
The 50 day EMA at 1257.45
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, 959.53
Resistance:
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 10 day EMA at 10,942
The 18 day EMA at 10,905
10,868 is the December 2004 high
The 50 day EMA at 10,794
10,754 is the February high
10,720 is the high in the recent lateral move
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 17
- New York Empire State Index, January (8:30): 22.0 expected and 28.7 prior.
- Capacity utilization, December (9:15): 80.5% expected and 80.2% prior.
- Industrial production, December (9:15): 0.6% expected and 0.7% prior.
January 18
- CPI, December (8:30): 0.2% expected and 0.2% prior.
- Core CPI, December (8:30): 0.6% expected and 0.7% prior.
- Net foreign purchases, November (9:00): $106B prior.
- Crude inventories (9:30): -2.887 prior
- Federal Reserve Beige Book (2:00)
January 19
- Housing starts, December (8:30): 2.05M expected and 2.123M prior
- Building permits, December (8:30): 2.1M expected and 2.163M prior
- Initial Jobless claims (8:30): 320K expected and 309K prior
- Philly Fed, January (12:00): 13.4 expected and 12.6 prior
January 20
- Michigan sentiment, prelim., January (9:50): 93.0 expected and 91.5 prior |
