InvestmentHouse Weekend Update:
investmenthouse.com
- Market closes out the week modestly lower.
- Core inflation continues to fade while Chicago PMI rises, construction rises.
- Looking for some new money to enter to start the week.
- Market looking for a breakout but has the jobs report ahead of it.
Good economic data cannot fight off the end of quarter profit taking.
There was plenty of economic data Friday morning, and the actual data was just fine. It was the prattle about recession that rattled futures. Greenspan reiterated its comments regarding the recession probability being a bit higher than the one-third he assigned to it a few months back. GS issued a report predicting recession. Okay. There is plenty of gloom.
As for the real data, incomes were a bit lower than expected, spending was a bit more than expected, and the core annual PCE inflation reading fell to 1.8%, a 3.5 year low. That was enough to rebound futures some, but they only made it up toward flat by the open. Nonetheless the market jumped higher to start the session. A half hour into the trade the Chicago PMI came out higher than expected and Michigan sentiment held steady. Still looked good.
The market did not react positively, however. After the move higher into quarter end on some low trade, the sellers moved in for some profit taking. That pushed the indices negative to end the first hour. After that, a steady climb higher through the early afternoon session. Nice steady comeback with energy trying to lead as it did early in the session. Then good old St. Louis Fed president Poole suggested that the market would be making a mistake if it bet on another rate cut. That harpooned the recovery, sending the major indices lower back into negative territory. A late rebound improved the picture, but could not push the indices positive.
Technically, while the indices finished lower, they basically closed in the same position as Thursday. NASDAQ, after tapping toward the July high (the post-2002 high), faded back modestly. SP500 and DJ30 remained in their lateral consolidations, still set up nicely to make the break higher. As noted Thursday, the NASDAQ action is questionable with that low volume drift up to the prior high. Maybe it can form a handle here as well and then break higher. That may be wishful thinking, but there was no vigor in the tech selling on Friday.
There was no real leadership either. Energy tried to take the reins early in the session, sold back, and then made another run at it in the afternoon. Then that 'tough love' Fed-speak from Poole that was likely just an attempt at dollar containment. The Fed is not going to come out and say due to lower annual core PCE inflation it was no longer worried about inflation. Might just as well bury the dollar if it did that. In any event, there was no sector willing to take the point Friday. Techs sold back modestly, energy continued its consolidation, and even China stocks took the day off.
Basically there was no change. Volume was up modestly but it was still far below average and thus it is hard to call the action distribution. NASDAQ remains in a vulnerable position, trading just below the prior high on low volume. SP500 and DJ30 are in good shape to break higher. In short, time for some different leadership to step up this coming week after the new money is put to work.
THE ECONOMY
Inflation continues its trend lower.
It is one of the hottest debates there is outside whether the Fed did the right thing or whether the negative confronting the economy will sink the stock market. Inflation.
If you take out food and energy you get a declining reading. Friday was the third straight month core annual inflation declined. It fell to 1.9% in June, held that level in July, and then fell to 1.8% in August. That was a 3.5 year low. That puts core inflation below the Fed's self-stated speed limit of 2% for 3 straight months. Moreover, it is declining at a faster pace, showing less than 1.5% growth rate for the past half year.
Back in late 2005 and early 2006 we reported that it looked as if the inflation pressures that impact the government's measure of inflation had peaked in October 2005. They continued to decline as time passed, though the inflation readings continued to move higher. Pressures, the things that cause higher inflation, abate before inflation does. It took a long time, but the inflation readings themselves finally started to turn and start a descent. We are very happy we made the call on the inflation top so that inflation would finally decline as it is now doing. Hey, why can't we take credit for it? Cramer does.
There is no question that large screen televisions, phones, computers, and other technology related products prices are falling. On the other hand there is no question that prices for items made of steel, copper, petroleum and materials with spiking prices are rising. What the government numbers show is that the decline in prices for those items falling in price is larger than the price increases for those items with rising prices. It makes no judgment on as to what prices are most important, it just tallies up the price changes and spits out the number.
Thus you get the slowing rise in core PCE prices, and right now that is what the Fed tells us it is watching. The argument then asks whether the inflation measures truly reflect the price activity. Maybe they do, maybe they don't. All we can say is that the way government has compiled the PCE for quite some time shows a slowing rise in core prices, and that means prices factoring in the rise in energy costs required to make the products.
Beyond that, however, when you look at the accurate leading inflation indicators (e.g. ECRI), they are also indicating this decline in inflation pressures continues. Thus we are likely to see core PCE prices continue to decline. Gold may not be reflecting this, though we have seen gold come back some from that surge following the Fed rate cut. It has not retraced all of that spike, however, and thus you have a serious split between future inflation indicators.
The dollar and its inflation contribution.
The biggest near term inflation influence is the falling dollar. As you know the dollar is at a record low versus the euro, at part with the Canadian dollar for the first time in 30 years, and the dollar index (DXY0) is at an all-time low since its inception, adding another big drop on Friday after the inflation data showed inflation rates slowing (and thus giving the Fed more free reign at cutting rates).
While a falling dollar is a boon to exports and even shops here in the US (the northeast is enjoying an influx of Canadians coming to the US to buy goods they cannot get in Canada), the broader impact is one of importing inflation from those countries whose currency floats against the dollar. As the dollar weakens it takes more dollars to buy the same amount of foreign goods and thus we experience rising prices on our end.
The effect is very apparent in oil. Sure there is widespread global demand for crude, but as the dollar weakens the price appreciates even more rapidly as price is marked up to keep up not only with demand but to make up the difference in the weaker dollar. Thus oil seems more expensive to us using dollars compared to those using euros. More countries are flirting with the idea of valuing oil in euros, and of course for us the next effect is the same: it is more expensive because the dollar is weaker versus the euro.
The Bush administration opened Pandora's box with its unstated weak dollar policy. It talked strong dollar but did nothing to back up the talk, and thus the world grew to believe the US would not support the dollar (and of course, it did not) and thus the start of the decline. As is often the case when you meddle in markets, what was thought to be a controlled effort at lowering the dollar faced assault from other areas as economic conditions changed around the globe. Imagine that; change occurring. That has hastened the dollar's decline to a point where it is dangerous of no longer being the store of value it once was.
To be sure it is not at that level yet. During the credit crisis where did the foreign investors go? Into US Treasuries, weaker dollar or not. The US still is considered the safety net for the world wealth given our rule of law, stability, and economy (even though its growth is less than that of other expanding nations). Nonetheless, there is an old saying that you never devaluate your way to prosperity. History is littered with wrecked economies that tried.
The Bush weak dollar policy has turned into a real problem as unforeseen pressures are now acting to drive it lower from an already weak level. You would think he would have known better given the issues in the late 1980's when his father let the James Baker group implement their old school (and wrong) policies re the dollar. Of course, when Bush got into trouble over Iraq, who did he bring in? He recycled Baker who came up with a report that basically said we should surrender in Iraq. Surprised it did not say something about letting the dollar weaken as well. The point is, the old line influence is alive and well in the Bush administration, and the same results are occurring. Problem is, we are not in the same position we were back then, i.e. coming out of a recession and the strength that accompanies a recovery.
Chicago PMI echoes the stronger Philly Fed, construction spending rises: data is trying to pick back up.
The regional manufacturing reports are on the upswing once more. After the Philly Fed (the laggard ever since the 2005 Gulf storms) posted a surprise gain in September. Chicago posted a better than expected read for that month as well, coming in at 54.2 versus the 53.0 expected and 53.8 in August. This is down from the 60+ readings in the summer, but the mean is still holding nicely. New orders are in the upper 50's again, backlogs are above 50, and prices paid fell 13 points to 59.0.
Next week we get the national manufacturing report, and with the improvement in the regional indices we are anticipating another solid showing overall. With construction spending in August rising 0.2% versus the -0.2% expected, the economy is trying to regain steam after the mortgage and credit issues hit. The extent of those issues is not fully reflected in the construction number as it was August, but as the PMI reports and the jobless claims indicate, there is no meltdown in the economy just yet.
THE MARKET
MARKET SENTIMENT
VIX: 18; +1
VXN: 21.01; +0.42
VXO: 18.18; +1.43
Put/Call Ratio (CBOE): 1.09; +0.24. Some quarter end shuffling with respect to option positions as well pushed the ratio back up.
Bulls: 55.6%. Bulls jumped again , up from 53.9% and topping the 55% level considered bearish. Big jumps the past few weeks from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 25.6%. Falling, indicating bears are declining. Down from 27.0% last week and 31.0% the week before. It held at 37.4% for 3 weeks prior to that. Still well off the very low 18% hit 8 weeks back, and it topped the June 2006 peak (36%) on this run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: -8.09 points (-0.3%) to close at 2701.5
Volume: 1.896B (+7.24%). Higher trade but still below average and in the range of the recent levels. It does change the up on up days, down on down days action we have seen of late, but it was also the end of quarter shuffle and that helped pump up trade a bit.
Up Volume: 875.612M (-149.219M). A dead heat re up to down volume.
Down Volume: 983.672M (+297.357M)
A/D and Hi/Lo: Decliners led 1.47 to 1. Middle of the road and matched the session.
Previous Session: Advancers led 1.41 to 1
New Highs: 28 (-50)
New Lows: 44 (+3)
NASDAQ CHART: Click to view the chart
The internals basically matched the session, i.e. flat. NASDAQ rallied early but then succumbed to some of that quarter end profit taking in its big names as we anticipated once the window dressing was completed. Nothing major on the session, just a bit volatile in a narrow range as the recent leaders suffered some pressure. The problem with the bigger picture is that low volume rise to the post-2002 high and the history behind such moves, i.e. the need to sell back to regroup and try again. There will be some new money coming in to start the week, and that could push NASDAQ over that level. The more important move, however, is after the new money is spent and whether NASDAQ can hold the break or not. Odds are that it typically won't, but there are two positive possibilities if it does not. One is it could form another lateral move at the old high and then make the break higher from there. Two is that SP500 and DJ30 are working in its favor. They have held onto good consolidations and are still ready to break higher. If they do so with some force they could take NASDAQ along with them.
SOX actually gained ground on the session though it was modest and it once again could not clear the 90 day SMA. It is, however, making a higher low the pat week and that puts it in position to make a run at 510 once more, a key level as it tries to recover once more.
SOX CHART: Click to view the chart
SP500/NYSE
Stats: -4.63 points (-0.3%) to close at 1526.75
NYSE Volume: 1.34B (+13.46%). Volume matched the early week levels, but that kept it well below average still. Basically more of a quiet lateral move in its consolidation.
Up Volume: 517.86M (-255.889M)
Down Volume: 803.666M (+411.513M)
A/D and Hi/Lo: Decliners led 1.26 to 1
Previous Session: Advancers led 2.04 to 1
New Highs: 72 (-51)
New Lows: 28 (+3)
SP500 CHART: Click to view the chart
Never really made any pretense it was going to try the breakout move on the session, moving positive by just a few points and then closing lower, just off the middle of the trading range for the day. Volume remained low and the internals matched the slow session. All in all, SP500 remains in excellent shape to make the breakout to a new high. It will get some early week money, but as noted with NASDAQ, the key is how it acts after that money is spent.
SP600 was the percentage loser on the session, and that makes sense given the small caps are the most economically sensitive and right now, while the economic numbers are not bad, they are not suggesting any roaring surge in US economic activity. With their lack of ties to the global economy, they just simply are not attracting the interest of the larger caps. They are not dogs; the overall pattern is still a cup with handle, but they are not setting the pace either.
SP600 CHART: Click to view the chart
DJ30
The blue chips bumped higher the last half of the week, just clearing the highs in the lateral consolidation or handle to the base. No volume on that move so there was no attempt at a breakout, and Friday they did come back some. Still in position to make the breakout along with SP500.
Stats: -17.31 points (-0.12%) to close at 13895.63
Volume: 203M shares Friday versus 156M shares Thursday as the quarter end shuffle raised trade modestly though it was still well below average and below the stronger sessions of the week.
DJ30 CHART: Click to view the chart
MONDAY
September and Q3 are in the books and September was not the boogey man it often can be. The indices posted gains and left the month set up to make breakouts to new highs. This despite a plethora of issues facing the economy (weaker dollar, rising oil, rising gold and commodities, etc.). At this stage the market is not giving much credence to those issues, however, as it focuses on the Fed rate cut and the economic data that is somewhat stronger yet shows weakening inflation. That allows the Fed to act as it feels warranted with respect to the credit issues versus being hamstrung by high inflation numbers AND a credit issue.
Monday brings a new month and quarter, and as we have seen the past few quarters, that means at least an additional bump higher as new money is put to work on the upside. But for NASDAQ's low volume climb to the July high we would be looking for that to break the indices out to new highs. NASDAQ's move makes that more problematical, and indeed we believe something of a test by NASDAQ and a continued consolidation by DJ30 and SP500 (though maybe lower in their consolidation ranges).
If we see a push higher Monday and Tuesday but once again not a lot of volume, we will be inclined to take some gain off the table in anticipation of a test by NASDAQ. We continue to see a lot of stocks still in position to resume their climbs after consolidating the last week or so, but we have to remain patient and move in when they start moving higher or at least slowly accumulate shares as they make their lateral moves. There is likely to be some jockeying as the new quarter starts as the new money hits and the sellers take their shot as well.
The overall action by the indices remains very positive, however, and thus we are continuing to look for those strong stocks that are testing and are preparing for the next run higher. This week holds a lot of economic data from the national manufacturing report (ISM) to the jobs report. After the August negative showing all eyes will be on this one to see if it was an outrider. As we have discussed before, it was the product of the slowdown seen in Q1 as it is a lagging report. Since that time the weekly jobless claims suggest the employment picture is strengthening outside of those storms that swept the nation in the summer.
With the jobs report on Friday we anticipate an early move higher as new money is put to work, then a pause and some retracement as that new money wanes and investors look to the jobs report. We anticipate SP500 and DJ30 holding basically in their consolidations until then. If that is not the case and they try the breakout in anticipation of the jobs data we will act according to what the strong stocks we are looking at as potential new buys and the ones we are already holding to chart our course. In other words, we let them show us if it is time to buy or not and we respond, just as we have been doing on this strong run thus far.
Support and Resistance
NASDAQ: Closed at 2701.50
Resistance:
2725 is the July high
2778 from a July 1999 peak
2729 is the November/February up trendline
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2699 is the November/December/February up trendline
2673 is the early July high
2634.60 is the June peak
The 10 day EMA at 2671
The 50 day EMA at 2608
The 90 day SMA at 2601
2531.42 is the February high (post-2002 high); 2525 intraday
The 200 day SMA at 2528
2509 is the January 2007 high
2450 is some price support from November and December 2006
2425 is that old trendline from August 2004 to May 2005
2400 is price support
2386 is the August intraday low
S&P 500: Closed at 1526.75
Resistance:
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak
Support:
The 10 day EMA is at 1516
The 90 day SMA is at 1497
1502 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low and early August peak.
The 50 day EMA at 1490
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1467
1461.57 is the February 2007 high.
1440 is the mid-January high
1427 represents some interim peaks from December 2006 and the early August low
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 - 70 from March 2007 low
1370 is the August intraday low
Dow: Closed at 13,895.63
Resistance:
13,925 is the old channel line
The July high at 14,022
Support:
The 10 day EMA at 13,759
The August high at 13,696
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The early July peak at 13,671
The mid-May peak at 13,556
The 90 day SMA at 13,485
The 50 day EMA at 13,483
13,242 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 200 day SMA at 13,020
12,845 is July closing low
12,796 at the February 2007 high
12,518 is the August intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 1
- ISM index, September (10:00): 52.5 expected, 52.9 prior
October 2
- Pending home sales, August (10:00): -12.2% prior
October 3
- ISM Services, September (10:00): 55.0 expected, 55.8 prior
- Crude oil inventories
October 4
- Initial jobless claims (8:30): 298K prior
- Factory orders, August (10:00): -2.5% expected, 3.7% prior
October 5
- Non-farm payrolls, September (8:30): 100K expected, -4K prior
- Unemployment rate (8:30): 4.7% expected versus 4.6% prior
- Hourly earnings (8:30): 0.3% expected, 0.3% prior
- Average workweek (8:30): 33.8 expected, 33.8 prior
- Consumer Credit, August (3:00): $9.0B expected, $7.5B prior |
