InvestmentHouse Weekend Update:
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- Just when market gets a Bernanke boost, the ‘other’ issues knock it right back.
- 2006 rally remains choppy, now featuring some distribution and breakdowns.
- Friday economic reports come in weaker but still solid. Too much economic hype?
- The forgotten story: Wages rising but benefits cost drop keeps overall costs trending lower.
- Someone needs to step up and lead.
Market sputters all week even with gift from Bernanke.
Up to Thursday, earnings and the anticipation of the Fed ending its rate hiking was enough to offset continually rising oil and gasoline prices, rising interest rates, and geopolitical worries (Iran, Nigeria, Venezuela). On Thursday earnings let the market down as XOM and MRO, two big energy names, missed their results. China raised interest rates as well. After those hits it took Bernanke saying the Fed might very well pause even with strong economic data for the market to recover.
Friday earnings failed the market again as MSFT missed expectations and its guidance was well below expectations. Seems that game market is just not as lucrative as a so-so operating system back in the 1990’s. Tech stocks were under pressure from the open as good earnings in technology had turned to a big name miss. The economic reports were lighter than expected, but still at levels that could keep the Fed active if it wants to be. Then the UN report on Iran was released, and though it was as expected, the fact was hard on the market, adding to the overall weight on stocks. As a final blow, Treasury Secretary Snow was not that adamant in his support of the dollar on a CNBC interview. The dollar tanked, something that has become an issue of late, particularly after the Bernanke ‘pause’ comments.
Energy and metals managed to rebound from the Thursday selling; they reversed breakout attempts and fell hard through Thursday. The Friday rebound in these stocks kept SP500 and SP600 positive for the session. That was about the only thing that kept the indices at support and still in position to move higher. As it was, NASDAQ and SOX faded to the 50 day EMA, while SP500 and SP600 held near support once more. Despite the up and down action, that still keeps them in position to rebound for the week ahead.
Choppy 2006 action continues, now with more distribution and breakdowns showing up.
We have called it the 1.5 steps forward, 1 step back rally, but lately it is more like 1/2 step forward and 1/4 step back. Yes the indices keep scratching out new post-2002 highs; the financial stations don’t miss any fractional move to a new high and are quick to harp about it. The indices cannot make a big breakaway move and put together a long run, however. There are flashes of greatness with strong, high volume sessions and good leadership breakouts, but within a day or two, sometimes even less, the move is knocked back.
There has been accumulation on the upside moves but there has also been distribution creeping in, 4 on SP500 this month, 6 on NASDAQ with a liberal reading. While many are crowing about the economic strength, to us this market action is a sign of the heavy baggage the economy is carrying with the high energy and gasoline costs. Sure the economy has moved right along with high prices, but as history tells us, pricing has a cumulative effect, and at some point prices simply get too high. We think the choke point is at $75/bbl and $3+/gallon gasoline. It may be a bit more, it may be a bit less. The market action the past month as energy prices ratcheted higher, i.e. the very choppy action with distribution, shows a real struggle. It is stumbling all over itself.
This is the rally in advance of the Fed stopping its rate hikes. As we noted before, it has been a struggle even with that impetus and the great earnings (until the end of last week). Even with the earnings and guidance coming in solid, it is struggling to advance. Energy and metals had set up well to rally once again, forming nice bases over the past 12 weeks. They broke higher but then rolled over last week, selling hard on Thursday. Leaders across the market in other sectors ran into trouble, many knifing through near support on volume. They are trying to set up once more but again, the market moves higher only to give a big chunk of it back. If this is the rally ahead of the Fed announcing it is through, it is certainly not a breakaway one.
That said, the indices had a tough week that was helped a lot by Fed Chairman Bernanke’s Thursday address to Congress. Even with that they closed lower on the week. Despite the losses, however, they also managed to hold support and maintain their uptrends. That is the constant of this rally (other than the jerky, volatile moves): holding support when it comes right down to it. That shows a continuing bid under the market. It has kept it moving higher to this point. Once more it has to prove itself now that the indices are back to support. Thus far they have come through and rallied when they had to. This week they will have to do it again.
THE ECONOMY
Nothing but kudos for the economy as energy spikes.
Just scattered economic data from April is in thus far, but already Q2 is being heralded as stronger than expected. You hear it every day: the economy is in a boom or a super boom. Pundits opine daily how oil just won’t impact the economy as before. The economy is more oil efficient. Consumers don’t care because their wages are up. The price rise is demand driven and thus higher prices are okay because it is demand for the products driving prices higher.
Whew. We are glad to hear that. Stupid us. We thought that at some point prices just get too high. Demand for stocks was great in 1999 and early 2000, but they did not keep going higher. I wonder why not given the demand? According to the oil demand theory, prices should have just kept going up as investors demanded stocks. Reality is, however, at some point, regardless of the item, point buyers don’t want to pay up anymore or they simply cannot do so. Demand drops and prices follow.
This talk about oil not impacting the economy this time (does that sound like a ‘new’ economy or another ‘it is different this time’ theory?), booms, and consumer nonchalance about gasoline prices has a 2000ish sound to it. One argument we hear floating around now is the “Gee, high oil prices haven’t slowed the economy yet, so we shouldn’t worry about it slowing as prices continue to rise.” Absurd. That is like saying it has rained 20 inches and the water isn’t in the house yet so let it rain another 10 inches.
What is likely to happen is a rather quick slowdown of the economy. It likely won’t happen this quarter, but it concerns us to hear the calls for a roaring Q2 so early in the game. Further, the market will show some impact before that occurs. That is one reason the choppy action this year, the recent failed breakouts, and the distribution have us concerned about the near future. Everyone is gushing over the ‘can’t fail economy’, but the market is not giving it as clear an endorsement. It hasn’t failed. It hasn’t even broken its uptrend. It just is not rallying with any authority as you would expect if the economy was so strong and so impervious to oil or other influences.
Employment costs, a red herring but Fed favorite, continue to trend lower
One of the areas that educated but apparently historically uninformed economists like to talk about is wages. The Employment Cost Index is a measure of those costs. It was up in Q1, rising 0.9% versus the 0.8% expected. Thus the ‘wage inflation’ hawks continue to squawk about rising wages leading to inflation.
Putting aside the historical fact that rising wages are not in and of themselves inflation or inflationary, the facts show that employment costs overall are falling. Sure wages have climbed as the economy has recovered, that is normal. They are still trending lower from 2001, however.
Add onto that the massive drop in benefits costs the past year and one-half and you have overall employment costs not only trending lower but currently falling. The drop in benefits is huge. It has been one of the costs dogging US business the past few years as they rose higher and higher as medical costs skyrocketed. The decline in those costs is helping corporate profits even as wages climb modestly. Indeed, the decline in benefits costs far outweighs any bottom line costs or potential inflationary impacts of the rise in wages.
Overlooked in the big picture, at least as far as what you hear from mainstream media and economists. Strange isn’t it, given how before oil jumped in price the past year one of the main media stories was the rising benefits costs confronting companies. A big campaign issue was healthcare for workers versus the costs on small businesses. Not many politicians got what they wanted, but there were more HSA’s made available. As they have grown in numbers, benefits costs have quietly dropped. Unheralded (heaven knows the Bush administration would not tout a victory) but a real success story for the US economy. Yet, even as they show they work, their detractors want them eliminated.
THE MARKET
MARKET SENTIMENT
The action remains choppy, up a couple of sessions then right back down, but volatility as measured by VIX is not rising. You can see volatility rising, however, in option prices as this choppy action pushes option volatility components higher.
VIX: 11.59; -0.25
VXN: 15.51; +0.3
VXO: 10.79; +0.02
Put/Call Ratio (CBOE): 0.87; +0.13
Bulls versus Bears:
Bulls: 45.4%. Bulls continued their second week of decline, falling from 48% and 53.2% before. After a month climbing close to the 55% level considered bearish, a much needed decline. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005. It is already heading back down to that level.
Bears: 25.8%. Faded slightly from 26%. Just a one-week blip higher thus far after declining for a month as bulls rose simultaneously. Rebounded from 24.5% the prior week but still well off its high at 33% for this cycle, a level that topped the prior two highs that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -22.38 points (-0.95%) to close at 2322.57
Volume: 2.6B (-2.58%). Volume was lower but remained strong as NASDAQ gapped lower and sat right on top of the 50 day EMA. Technically not distribution, but strong selling volume nonetheless. NASDAQ has undergone 6 distribution sessions this month, right at one-third of the sessions. That shows a fairly high level of by big institutions and can be a precursor to a sell off. Have to watch closely as NASDAQ tests this support.
Up Volume: 743M (-900M)
Down Volume: 1.806B (+807M)
A/D and Hi/Lo: Advancers led 1.19 to 1. The A/D line peaked in March as it flattened out that month. In April it made a lower low and a lower high. It is now moving back up to test that lower high. Still in a position it can recover from, but the test of the prior high this next week will tell more of the tale. For now it has made an interim peak that is another indication of the struggle the market has undergone as oil moved to $75/bbl.
Previous Session: Decliners led 1.19 to 1
New Highs: 170 (+6)
New Lows: 51 (-3)
The Chart: (Click to view the chart)
Thursday NASDAQ rebounded after a gap lower when the Bernanke pause was postulated, racing higher intraday. It gave back the lion’s share of the move, not a great technical indication. Friday it gapped lower once more, as MSFT’s move into gaming just isn’t producing the results. Once again it tried a rebound, cutting its losses to 6 points in the first hour before peaking and fading the rest of the session. On the low it tested the 50 day EMA (2315) and bounced some. That keeps it above that key support and right at (just a hair below) the October/March up trendline (2325). That keeps NASDAQ still in position to move higher as it bucks it the twin tops in April. The second top was on volume, so not a classic double top. Once more NASDAQ is at the bounce or head lower stage.
SOX (-0.62%) sold as well, but once more held above the 50 day EMA (513.51), indeed, closing at the 10 day EMA (516.33) without tapping the 50 day this time around. Not that big of a deal, but it has tap danced all over that level this week as the techs and semiconductors struggled to hold support and failed to advance. Can still make a higher low here and continue its series of higher lows since the late March double bottom. Looks kind of decent here. NASDAQ could sure use the help if it can put together another bounce from this support.
SP500/NYSE
Stats: +0.89 points (+0.07%) to close at 1310.61
NYSE Volume: 1.791B (-13.91%). Volume backed off as well on NYSE as SP500, SP600 posted modest gains. No accumulation but still solid volume on the up session, helped by the recovery of energy and commodities. Four distribution sessions this month; not as serious as on NASDAQ.
A/D and Hi/Lo: Advancers led 1.53 to 1. Modest breadth gain. As with NASDAQ, the A/D line flattened in March and faded in April.
Previous Session: Advancers led 1.03 to 1
New Highs: 173 (+6)
New Lows: 98 (-40)
The Chart: (Click to view the chart)
SP500 continues to hold up quite well after coming back from a near death experience the second week of April when it tanked lower and below the 50 day EMA. It was saved by the FOMC minutes, tested back to the 50 day EMA (1295) intraday Thursday as stocks tanked on the Chinese rate hike and Exxon earnings, was saved again by the Bernanke statement, and sat still Friday on lower volume, holding near support at the 10 day EMA (1306) on the low. That keeps the large cap index in the upper half of its 6 week range with something of a reverse head and shoulders base forming over the 50 day EMA. From just about ready to give up the jewels to making a higher low and trying to set up the next breakout. There is some resistance at the Friday close, but the 1316 to 1318 level has stopped it the past two weeks.
SP600 (+0.47%) enjoyed the rebound in the energy and commodities stocks; many of them are smaller issues and are found on the small and mid-cap (SP400) indices. SP600 is still testing back the past week from a strong bounce higher on the FOMC minutes release. Trying to make a higher low near the 18 day EMA (393.47), just below its upper channel line in its uptrend, tapping that level on the intraday high Friday (397). Good point to make a higher low and continue the shift of the channel to a higher level.
DJ30
Volume exploded as MSFT was passed around like Dad’s Playboy at a sleepover for 13 year olds. All in all, however, DJ30 held up very well, moving sideways just below a . . . post-2002 high. Showing some of the better action of the big indices, still in very good position to extend its move. Have you noticed how MSFT has not done squat since being added to the DJ30. Pretty typical. In any event, DJ30 is holding up well and after testing the breakout last week, holding the 10 day EMA (11,309), it is ready to move higher anytime the rest of the market is ready to join it.
Stats: -15.37 points (-0.14%) to close at 11367.14
Volume: 738M shares Friday versus 361M shares Thursday. MSFT alone accounted for 591M shares
The Chart: (Click to view the chart)
MONDAY
The week starts with a bang with personal income and spending, construction spending, and the national manufacturing report. This economy is booming, so expect booming numbers, right? They are all March numbers (from Q1 with its 4.8% GDP), so they will indeed likely remain strong. The week ends with the April jobs report, and there is always a lot of print and intrigue with respect to that lagging indicator. Of course since the idea floating around economic roundtables is that because workers are making so much money they don’t worry about gasoline prices, it is important that the jobs report is strong, at least in the minds of those thinking that the economy is bulletproof even with high energy prices.
We don’t want to get into the trap of sounding as if the market is in the crapper. It obviously isn’t as it is trending higher. What we are being very careful of here is whether the market is in transition into something else (like on deck for the crapper). Always on the top of the list when the action is choppy is a transition into a downtrend or correction as the current trend is up. The current trend is itself volatile. The A/D line has flattened and faded. There is distribution. Energy and commodities set up and broke out, just to turn over and give the breakouts back. Other leaders sold hard through near support last week. There is a general lack of concern about any possible hiccups in economic growth similar to the foolish views in early 2000. Those are a lot of issues. Thus far they have not dragged it down, but as noted, the rally is not just up and away.
Thus while the market is still trending higher we are keeping an eye on the door and watching how many are trying to get through it. At the same time the economy and market have not stopped advancing even as energy rises and geopolitical issues keep the pressure on. Thus we have to continue looking for opportunity as the market keeps advancing. There are still many solid stocks that are making nice, orderly pullbacks to near support, preparing to continue their moves. There were more breakdowns last week, however, so the pond of possible choices is drying up a bit more. Everyone wants commodities and metals, and there are still some good patterns setting up in those sectors, but many of the early leaders are very extended and carry a high risk level. We saw energy stocks set up for their next move higher, forming some nice bases, but then after a quick break higher they got slapped back down. They are doggedly trying to set up once more, but you always hate to see a nice pattern and breakout get tossed back in your face. Other stocks were in nice trends but were pricey and got slapped when earnings came in. Good but not good enough to support the higher price.
In sum, the market has not broken down but it is also showing signs of wear and tear, and leaders are getting a bit harder to find at a really good entry point. We are going to continue to ferret out strong stocks showing good buy points because each time this market has been on the ropes it makes a comeback. The problem is, that ‘on the ropes then the comeback’ happens on a fairly short timeframe and that tends to grind up positions as they bounce up and down with some rather wide ranges intraday and some pretty big volume both ways. Thus we stick with what has held up the best, has good credentials (fundamentals), and is in position to buy. As the week progresses we are also going to get ready for some downside action as well if the stocks that broke through support last week rebound but cannot move back through resistance. They will set up as this week progresses. There were more of those than we liked, so how they recover this week and next will tell more about the market’s ability to push on from here.
Support and Resistance
NASDAQ: Closed at 2322.57
Resistance:
2325 is the October/March up trendline.
The late January highs at 2325
2328 from the May 2001 peak
The January high at 2333
The 18 day EMA at 2334
The February closing high at 2361
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The 50 day EMA at 2315
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
S&P 500: Closed at 1310.61
Resistance:
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the
February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
The October/March up trendline at 1308
The January high at 1303
The 18 day EMA at 1303
1297.57 is the recent February high.
The 50 day EMA at 1295
The late January peak at 1285
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
Dow: Closed at 11,367.14
Resistance:
11,401 from the September 2000 peak and the recent intraday highs
11,425 from April 2000 peak
Support:
11,350 from the May 2001 peak is giving way.
The recent March highs at 11,329 to 11,335
The 10 day EMA at 11,309
The 18 day EMA at 11,268
11,159 is the February high.
11,162 is the October/January/February up trendline.
The 50 day EMA at 11,162
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 1
- Personal Income, March (8:30): 0.4% expected, 0.3% prior
- Personal Spending, March (8:30): 0.4% expected 0.1% prior.
- Construction spending, March (10:00): 0.3% expected, 0.8% prior
- ISM Index, April (10:00): 55.1 expected, 55.2 prior.
May 3
- Factory Orders, March (10:00): 1.5% expected, 0.2% prior
- ISM Services, April (10:00): 59.4 expected, 60.5 prior
- Crude oil inventories (10:30): -0.226M prior
May 4
- Initial jobless claims (8:30): 315K prior
- Productivity, preliminary, Q1 (8:30): 3.0% expected, -0.5% prior
May 5
- Non-farm payrolls, April (8:30): 190K expected, 211K prior
- Unemployment rate, April (8:30): 4.7% expected, 4.7% prior
- Average workweek (8:30): 33.8 expected, 33.8 prior
- Average hourly earnings (8:30): 0.3% expected, 0.2% prior
- Consumer credit, March (3:00): $4.5B expected, $3.3B prior |
