InvestmentHouse Weekend Update:
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- Jobs report kicks the market when it was down.
- Jobs are understated in the July report; economy starting to expand already.
- Selective memories, faulty comparisons regarding economics.
- Despite the drama, summer still shaping up rather typically, and the timing is not that bad.
The problem with expectations . . .
I once dated a girl who said those who expect nothing are never disappointed. While I never really was sure if she was talking about me, the saying makes obvious sense. Humans, however, cannot escape expectations. Even in the stock market, where all emotions are boiled down and then distilled into a trend, hope springs eternal. Time and again this leads to unreal expectations, and those expectations often go unmet.
After a slower June jobs report, the hope was that jobs would rebound in July. After all, Greenspan himself had said the June slowdown was as temporary as the inflationary pressures. Despite other reports noted Thursday night that indicated jobs were not growing in July, hope and anticipation crept in. The whisper was at 300K or better. The actual was lower; by a factor of 10. Reality has a way of reasserting itself.
The jobs data added to the problems spiking oil prices have caused the market. A slower consumer in June shows prices already impacting buying decisions. Prices continue at 21 year highs because of the fear premium. Each time prices start to back off and seek equilibrium toward the low thirties, something has upset the cart. That is the one of the other realities facing the market presently.
The additional problems supposedly shown by the jobs report was enough to further the selling, sending the major indexes and those that have been holding out to new lows for the year. The market had been trending lower, building a base after a strong 2003 and ahead of a continuing economic advance. A slower advance, but still a solid expansion. The sustained oil price increase was poking holes in the base, and the jobs report, albeit erroneously, was viewed as indicating an economic slowdown was a sure bet.
That pushed the last holdouts in the indexes below the bottom of the 2004 base, and this time both NASDAQ and NYSE volume was higher. NASDAQ breadth was -4:1. The indexes lost anywhere from 1.5% (DJ30, SP500) to 3.9% (SOX). This is follow through caliber action, just the wrong direction. The market posted a downside follow through, confirming the market�s weakness.
Sounds bleak, and the patterns look bleak. That means things are finally getting better, or at least have started the process of getting better. The market was in a base but failed several attempts to make a serious upside move. Apathy has remained high (and thus fear low) the entire year. Bulls have been sure everything would be fine. This breakdown is finally casting doubts on that thesis. Now there is concern the economy is going down as investors use a lagging indicator as their confirmation. Fear is starting to creep into the sentiment indicators. It still has a long way to go, but this kind of breakdown often starts the sentiment spiraling. The timing is about right as well. A late summer trough, a rebound attempt, then another test of the latest lows in September to set up a run into the end of the year.
THE ECONOMY
Why would the market behave as outlined above? Because we really don�t think the economy is sliding off into another recession, at least not yet. Oil prices are too high, and if they stay there through early fall, that is a real problem. We already see gas prices moving contra to oil prices, even before the recent gasoline inventory news was released. When the driving season ends over the next 2 to 3 weeks, that will relieve even more pressure. We would also bet that oil prices will be down near the mid-thirties by election day given the Bush administration�s relationship with key oil producing nations.
Was the jobs report that bad?
That removes pressure on the economy from oil prices. What is in its place? Well Friday many would have you believe another recession. They took the jobs number and extrapolated a nasty economic forecast in a knee jerk reaction. 32K jobs created overall (243K expected, over 300K whisper) with May and April written down by 30K each. That was the �shocking� headline number. Retail and mortgage lending took the biggest hits; no surprise given the weaker June and rising interest rates slowing refinancing. Almost overlooked were the 10K gains in manufacturing, making the last six months the best gains in that sector in six years. The part of the economy that was experiencing a summer slowdown lost jobs while those that were growing through the summer posted gains. No real mystery or shock there.
Numbers not adding up and a substantial upside jump is ahead.
We noted Thursday night that summertime is a very difficult period to estimate payrolls. There is so much transition ongoing in auto manufacturing, retail, vacations, etc. that accurate readings are not possible until things settle down. We view the 32K as grossly understating the month. The unemployment rate fell to 5.5%. That is a survey that asks citizens if they are working or not. There are no �seasonal adjustments� made that skew the results. You have to understand how adjustments work; if the jobs data they collect does not meet the expectations, they adjustments take it the opposite direction. Thus you can have wildly inaccurate data in a month.
Indeed, the household survey where there are no adjustments made showed a gain of 629,000 jobs. This was not caused by people leaving the workforce, but by people responding �yes� to the question as to whether they were working. That picks up all of the self employed and the temps, and it also irons out the problems of summer and seasonal adjustments that corrupt the employer report. There is once again a huge disconnect between the employer report and the household report.
Despite Greenspan�s self-serving statement to Congress that the employer report is the most accurate, the last time we saw this kind of discrepancy was right before the employer report exploded higher with those big 288K and 320K months. Those came right after a period where it is hard to gauge the employer report as well, the holiday retail season. Once this season of adjustments is over we expect to see another big upside breakout and revisions to June and July.
Other economic indicators, leading indicators, are already rebounding, show no recession ahead.
July already showed us a very strong jump in the regional and national manufacturing and service sectors in the PMI and ISM reports. The employment components of each were lower, but as sure as night follows day, when the manufacturing and service sectors show this kind of expansion, jobs will follow. ECRI, the very solid leading economic indicator service, while showing slowing growth, continues to show that there is no recession ahead. Growth is not expanding as rapidly as it was, but it is still expanding even as the economy moves through a trough in the economic cycle.
Stocks are in the process of giving back a big chunk of gains made ahead of and during the big burst in economic growth. NASDAQ is down 17.5%, giving back 377 points from the high. That is just 64 points from a full 50% retracement of the gains from the March 2003 low, often a level that fully consolidates the prior gains. With companies pulling in their Q3 estimates, the market had to take some back. Indeed, the market anticipated this with the 7 month correction. We think it is getting close to start putting in a serious bottom in anticipation of economic growth continuing its resumption and showing up strong in Q4.
Kerry�s economic advisor has a case of deliberate memory loss, a.k.a., your stance on the numbers all depends upon what you want to accomplish.
Gene Sperling, former chief economic advisor to President Clinton and John Kerry�s current chief economic counsel, dramatically commented Friday that the jobs report was �a disaster for American workers.� Certainly the 32K was less than expected (and as we note, most likely vastly understating jobs), but the economic data this year, while lower than 2003, is still solid. Since January 91K manufacturing jobs have been created (the best string of growth in 30 years). Unemployment is at what is historically considered a low 5.5%. GDP the past 4 quarters has grown at 4.8%. Again, not the explosive growth of 2003, but very solid numbers.
Flashback to summer 1996 when President Clinton was running for re-election. GDP the prior 4 quarters grew at 4%. Unemployment was 5.5%. Manufacturing jobs created January to July that year, -8000. At that time Sperling proudly paraded the numbers to the electorate, noting that the combination of these reports warranted Clinton�s re-election. The numbers were worse during the first half of the year Clinton was seeking re-election, but at that time they were worthy of re-electing the incumbent. Better numbers now, after a horrid economic and stock market implosion, are not worthy of the same treatment.
It is critical to remember that President Clinton inherited a rapidly expanding economy. To wit, Q4 1992 saw GDP growth in excess of 4% as the economy came out of recession during the election. In the first four years of his presidency, that did not change much as the above numbers show. In 2001, President Bush inherited a rapidly declining economy with GDP growth from second half 2000 falling from the 7.4% level to negative in just three short quarters, the bulk of which were not on his watch. To already have economic growth such as seen in 2003 (growth rates at 20 year highs) is truly amazing given the hard crash from lofty heights and the economic shutdown following 9-11. Repeal or let the tax cuts expire because they caused a deficit? Lord help us if we did not have them to spur the economy and produce such dramatic growth rates.
Someone with an agenda can forget what they want and say what they want in order to make a point. We see it every day in this campaign. The numbers are the numbers, however. As long as you are comparing apples to apples, they don�t lie or spin or skew the truth.
THE MARKET
The breakout to the downside was complete Friday as all of the major indexes, other than SP600, closed at 2004 lows. SP600 managed to hold above its May lows, but it is only a matter of time. Failures to make key breakouts when the opportunity was there, distribution eroding the base, leading stocks breaking out and then failing. Weakness begat more weakness.
Now that everyone is talking about the �two horrible days in the market,� a supposedly dying economy, and the odds of Fed non-action as opposed to rate hikes, things actually look better for the market. Kind of the old �have to burn it to save it� mentality. Seriously, there was way too much bullishness in the market for it to make any serious headway even if it did rally. Every day on the financial stations for the past few months we heard about how things were going to be fine because this was a normal correction, the economy was good, it was an election year, blah, blah, blah. Toward the end the distribution days kept popping up and breakout chance after chance was squandered. The long base was working on investors, but it was not really shaking them out as they were told to hang on, help was on the way (sorry Dick Cheney, but we are not the first to use your line from 2000). Now those beliefs are getting shaken.
Thursday night we were looking for a further selloff on Friday, and it delivered on stronger volume as the fear started to kick in. The selling capped off a nasty week that turned a modest gain Monday into four straight losing sessions, the worst week since March and April. A little more follow through to the downside and it will be ready for a relief bounce. That will only work to set up some downside and eventually a test of the new lows that are hit. Then we look for a rebound to set up a breakout.
In the typical situation, this should happen over the next 5 to 7 weeks with a bottom hit in September, then some building into October and then a break higher. That is more of a typical pattern from a year that should be, well, more typical than 2003 where stocks surged without pullbacks. After a move like that the following year stocks suffer a bit more than usual. Still, the overall pattern is more typical, i.e., a summer slump, an early fall, drop, a bottom, then a rally into the end of the year. Though the action looks grim right now, with an economy that is not on its death legs as it is made out to be, things are setting up in a way we have seen several years in the past when the market broke down in late summer such as this.
Market Sentiment
They say you cannot help an alcoholic until he wants to help himself. When the market is selling, it doesn�t have much of a chance for a serious rebound until there is enough fear to get enough people on the sidelines along with enough money to sustain a serious run higher. Also, the money cannot all come in at once because if it does, the ammunition is gone in a July Fourth-like fireworks finale, leaving a pretty nasty fall back down.
That is why there has to be enough fear in a sell off: get the long buyers on the sidelines and then slowly bring them back in as things improve. These indicators were locked in lethargy, and as quick as a few days are starting a significant move.
Bulls versus Bears: That is starting to happen somewhat. This past week bullish advisors dropped to 48.9%, coming down from almost 60% in late June and early July. 55% is considered bearish for the market, 35% bullish. Still to bullish, but heading in the right direction. At the same time bears are rising, coming in a 24.5% last week, up from below 20%. 20% is considered bearish. The best indication from these is when they cross, flying past one another like speeding jets. Still a long way from that level.
VIX: 19.34; +1.02. After breaking through the 200 day SMA and testing it in late July, volatility is breaking out. In May it almost hit 30, and that helped set off the mid-May to end of June rally. VIX was not high enough, however, to sustain a long run. Before this correction is ultimately over we anticipate VIX will hit near 40 or better.
VXN: 27.45; +1.26
VXO: 20.24; +2.12
Put/Call Ratio (CBOE): 1.38; +0.52. Surging back over 1.0, and doing it on the third and fourth day of selling for the week. We were backing off on our downside buys Friday as many more were ramping up their purchases. Even the overall put/call ratio (counting all options exchanges) jumped to 1.03 on the close. This means that more are playing the downside than upside, and when that happens, it is an indication that the downside move is getting old. That means we most likely have some type of rebound coming after this torching. We don�t believe it is the end of the selling, just letting off some oversold pressure and helping set up the final bottoming move.
NASDAQ
Diving to new depths for the year, further undercutting the important October 2002/March 2003 up trendline.
Stats: -44.74 points (-2.46%) to close at 1776.89
Volume: 1.713B (+7.47%). Volume was up Friday, moving back above average as tech stocks distributed (high volume selling showing net sellers versus buyers). NASDAQ selling volume has not been that severe of late. Indeed, as a percentage of NYSE volume it is dropping. It is not near the lows of December 2003, but NASDAQ has not shown the same virulence in downside volume as NYSE. That is an indication, not a �buy now� light, that the market is getting sold out. When the speculative index sells on lower volume vis-�-vis the more staid NYSE, that starts to show the market starting to set up more of a bottom.
Up Volume: 182M (-47M)
Down Volume: 1.523B (+195M)
A/D and Hi/Lo: Decliners led 3.66 to 1. This has been high on NASDAQ, but not what you would call extreme levels.
Previous Session: Decliners led 2.7 to 1
New Highs: 12 (-5)
New Lows: 297 (+162). Getting there. 400 to 500 new lows coupled with other indicators would signal a close bottom.
The Chart: (Click to view the chart)
NASDAQ continued its fall, gapping lower, unable to make any serious rebound, then diving lower in the last hour. The move pushes it closer to 1755 where there is a July 2003 high. That level is not what we would consider strong support as it represents a single high. Below that there is some support near 1700, but the last real base with multiple highs is near 1500. That 1755 level more than likely will bounce the index higher in a relief or oversold bounce move. After breaking through the bottom of the range NASDAQ has to find the next bottom, rebound with a rally off of that level, then come back for a test before it will be ready to make a sustained rally.
QQQ/NDX made a clean gap below the bottom of their 2004 bases on stronger volume. NDX actually has some decent support at 1300 (closed at 1315). That is roughly 32 on QQQ. We will be looking for that level to help set off a relief bounce.
S&P 500/NYSE
The large caps definitively broke through the bottom of their 2004 base on the strongest volume since late July. Heading toward near support to give it a relief bounce.
Stats: -16.73 points (-1.55%) to close at 1063.97
NYSE Volume: 1.519B (+9.12%). Volume was not as strong as NASDAQ, but as a percentage it is gaining ground. It was the strongest trade since late July, and shows dumping of the large caps as they work to catch up with the techs and semiconductors that sold down hard ahead of them.
Up Volume: 246M (+87M)
Down Volume: 1.269B (+60M)
A/D and Hi/Lo: Decliners led 1.61 to 1. Very mild given the hammering the small caps took.
Previous Session: Decliners led 2.68 to 1
New Highs: 26 (-1)
New Lows: 156 (+76). Not enough.
The Chart: (Click to view the chart)
The large caps finally gave way with a clean, high volume break below support at 1075. A tough week of selling with a 44 point loss. That is hefty selling, and it will require at least a modest rebound soon. The 1050 level provides some good support from an October and November 2003 consolidation. Not enough to be the bottom of the next test lower, but enough to set off a relief bounce after this harsh selling bout.
The SP600 small cap index dove below support at 270 and closed just over the May low at 263. This breaks it down from its head and shoulders pattern and sets up a potential move down to the 250ish range. The small caps have led for the entire rally. Their breakdown indicates more time is needed to bottom and rebuild.
DJ30
The blue chips undercut the May lows (9852 intraday, 9906 closing) as they also fell from their 2004 base. Volume was up, but the blue chips are already right over some near support near 9850 from October and November 2003. That level should provide a relief bounce point, and it handily coincides with the support points for SP500. After that test, 9600 to 9500 is the next level lower.
Stats: -147.7 points (-1.48%) to close at 9815.33
Volume: 216 million shares Friday versus 178 million shares Thursday.
The Chart: (Click to view the chart)
THIS WEEK
The FOMC meets for a one-day meeting Tuesday to determine interest rates for the next month (September brings on another meeting). Fed funds futures indicate a 25 basis point rate hike is a lock for that meeting, but the September meeting is now down to about a 12% chance from a 100% chance just a couple of weeks back. The Fed can ill afford to not raise rates lest it send a nervous, �we don�t know what the hell we are doing� message to the market. While that is the case, it is one thing for the market to suspect it versus the Fed to make a bald faced admission to that effect.
The Fed is thus locked into a 25 basis point hike based on Greenspan�s testimony to Congress just a few weeks back as well as the need to get some maneuvering room for down the road. It most likely should not raise rates. If the Fed had not already started hiking rates, it would not start now based on these numbers; that is the irony of how the Fed paints itself into a corner, and even though it leaves itself an out by saying it will look at the economic data as it comes out and make decisions based on that data, it cannot renege on its statements so shortly after they were made. There is no �maestro� percentage in that. This is just another reason why the Fed should set a target, get to the target immediately, then act as necessary from there. It has room to maneuver and can make a big impact, symbolic or otherwise, but its moves from that point. The �go slow� policy is Chinese water torture.
The market won�t like the rate hike given that it now views the economy as in serious trouble. It is not, but this is part of the perception change that the market needed in order to break the Polly Anna view it has had toward the economy and the market itself. We are expecting a further downside close to those near support levels highlighted above for each index. From that point we anticipate a relief bounce to commence where stocks move up to test the break below the 2004 base.
That sets the next stage for a test lower once more. We would like to see that rebound last a few weeks, getting back up to resistance, toy with a breakout, but then fail. That bounce would take us into September, and then the last leg of selling would make that of-noted September/October bottom. Seems pat, but as we have seen, this is a more pat year than prior 5.
For this week the market is in no man�s land. By that we mean the market has made a solid break in one direction and is more than half way to the next level that will cause a move the other way. In this case it is those support levels discussed in the individual index sections. In general that makes entering new downside plays at this point higher risk. There are always quite a few exceptions to the general trend.
In addition, there are leading stocks we have been watching that have raced ahead but are now pulling back and testing those moves. With the indexes approaching near support and setting up an oversold bounce, these stocks can provide us nice upside for a trade or even more. We need to be careful on these, however, if looking for longer term investments. The market will need another break lower even after it rebounds here. That move lower will tend to take most stocks with it as fear levels prompt investors to dump everything and ask questions later. Thus, we take the gain that is there, and when it and the indexes start running into trouble, bank it and prepare for the downside move. On stocks you want to keep, covered calls are not bad at that point either.
Support and Resistance
NASDAQ: Closed at 1776.89
Resistance:
The October 2002/March 2003 up trendline at 1818
The 10 day EMA at 1840.
The 18 day EMA at 1872.
The May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The 50 day EMA at 1921
The 2004 down trendline at 1952
The 200 day SMA at 1980
Support:
July 2003 highs at 1755.
1750
June high at 1677.
S&P 500: Closed at 1063.97
Resistance:
May low at 1084 (closing) to 1076 (intraday).
1096 to 1100.
The 10 day EMA (1090)
The 18 day EMA at 1097
The 200 day SMA at 1108
1125 was key price support.
The March/April down trendline at 1124
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support:
1062 - 1058 from November 2003
1048-1040 from September 2003
1010 - 1015 from June/July 2003
Dow: Closed at 9815.33
Resistance:
May low at 9852 intraday, 9906 closing
10,000 is the March lows and a psychological level.
The 10 day EMA at 10,041.
The 18 day EMA at 10,088.
The January/April down trendline at 10,176
The 50 day EMA at 10,177
The 200 day SMA at 10,233
Late April, June peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
November 2003 highs: 9900 intraday, 9858 closing.
9500 from various price points in late summer to fall 2003.
9250. More solid support from the June through August 2003 consolidation.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.
August 9
- Wholesale Inventories, June (10:00): 0.6% expected and 1.2% prior
August 10
- Productivity-Preliminary, Q2 (8:30): 2.0% expected and 3.8% prior
August 10
- FOMC Meeting (2:15): Expecting a 25 basis point rate hike.
August 11
- Treasury Budget, July (2:00): -$60.0B expected and -$54.2B prior
August 12
- Business Inventories, June (8:30): 0.5% expected and 0.4% prior
- Export Prices ex-agriculture., July (8:30): -0.1% prior
- Import Prices ex-oil, July (8:30): 0.0% prior
- Initial Claims, 08/07 (8:30): 340K expected and 336K prior
- Retail Sales, July (8:30): 1.1% expected and -1.1% prior
- Retail Sales ex-auto, July (8:30): 0.4% expected and -0.2% prior
August 13
- Trade Balance, June (8:30): -$46.5B expected and -$46.0B prior
- PPI, July (8:30): 0.3% expected and -0.3% prior
- Core PPI, July (8:30): 0.1% expected and 0.2% prior
- Michigan Sentiment-Prel., August (9:45): 98.0 expected and 96.7 prior
Don why did you not highlight that Warren Buffett is still not finding buys in the stock market because he does not see enough opportunity for profit? Certainly a good article but I believe the entire passage should have been in bold:
"The king of long-term value investing, Warren Buffett, was holding $36 billion in cash in Berkshire Hathaway (BRK.a ) at the end of 2003, up from $13 billion at the end of 2002, and $6.5 billion at the end of 2001. The reason, he explains in this year's shareholder letter, is that he's not finding enough businesses or stocks to buy with "opportunities for significant profit." |
