InvestmentHouse Weekend Update:
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- NASDAQ earnings help push market higher to end week, but not much action for an expiration Friday.
- Oil struggles to hold uptrend: more thoughts on an overheated energy market versus a sign of economic trouble?
- Earnings providing some support as market continues attempt to form an October bottom for a year end run.
Strong earnings try to propel the market, but action trails off to end the week.
GOOG, SNDK and others proffered strong earnings results and guidance and they were rewarded handsomely. The market started off strong along with those stocks, ready to rally once more after dipping Thursday in response to the mid-week follow through session. After the higher open, however, stocks waffled and then drifted up and down the rest of the session, holding onto some gains, but very slim gains indeed.
Semiconductors looked ready to make some headway after the Thursday close. They did, but the 0.91% gain was not the 2% or better you would expect given the strong earnings hitting the book. It was certainly not the ‘rumble’ we were looking for.
There was no real economic news, just more Fed-speak about how tough the Fed was going to be on inflation. That was old news to mix in with the new earnings results, and in the end there was little change on the day.
Indeed, the market continued its work on its attempt to form an October bottom. The move Friday was not nearly as dramatic as the previous sessions last week where the market flip-flopped more than a politician at a two party political rally. NASDAQ posted a nice gain, reversing a good chunk of the Thursday fade, but the other indices posted quite modest advances, hardly in league with the volatility seen earlier in the week.
Technical indicators quite tame.
As for the technicals, they were much tamer, hardly what you would expect for an expiration Friday, particularly in October. Volume was lower though it did remain above average. Surprising for an expiration Friday, but there was no shortage of trade to end the week. Friday may have seen lower trade, but it was not weak trade. Volume rally surged to end the October expiration, starting with the big follow through volume Wednesday and lower but still strong volume Thursday. Plenty of trade as SP500 tests its up trendline and NASDAQ recovered and held the 200 day SMA. You want to see volume jump when an index holds an important support level: that shows buyers ready to step in and support the index as it tests key support. That is another attribute of the bottom building the market is attempting.
Breadth was the Achilles’ Heel for the Wednesday follow through session, and as we saw it was not up to the 2.5:1 or 3:1 level you would like to see. Indeed Thursday’s downside breadth nearly hit 3:1 on NYSE when Wednesday it could not even scratch out a 2:1 session. Friday breadth was a bit better, but by the close the indices still could not top the 2:1 levels hit intraday.
Still working on a bottom and still a lot of work to do.
We anticipated volatility for the week what with earnings, expiration, and the test of key support levels. The market delivered with daily direction changes. There was a follow through session Wednesday that was a big positive for the bottoming process. It was almost tossed aside Thursday as the market dumped lower, giving back all of the gain. Volatility indeed. Volume was lower and that was one of the big silver linings for the session. It did not hurt that SP500 held its up trendline.
Friday the market was set to deliver some solid upside, but outside of NASDAQ and SP600 the move was mostly a disappointment. When you factor in the low volume the move did not amount to any change of character, just more of the back and forth movement as the buyers and sellers work out their issues and try to set a bottom. Technically the market remains in a weak position, but it is trying to establish that October low. It has made progress, delivered a follow through, technology looks ready to move higher, and tech earnings are supporting that notion.
Outside of that, however, stocks are still below key resistance and have not broken a serious of lower highs since August. The Federal Open Mouth Committee remains more than ready to take the US economy lower in the face of higher energy prices so that China and India can benefit from lower prices once the US economy has slid to stagnant growth. That may not be its goal, but as it continues to fight inflation via the housing market and oil prices, it is going to have a problem keeping the economy afloat. This is going to be the issue confronting the market again in 2006, and indeed the market will be hard-pressed to make headway if the Fed continues past January 2006.
THE ECONOMY
Oil continues struggle to hold its trend
There is an old market adage about leadership; when energy leads the way, it leads the market to its own demise. The reasoning is quite simple. The reason energy stocks rise is because product prices rise. While great for the energy companies, at some point prices get too high and the economy cannot continue to grow. It stumbles, falls into recession or some form of stagnation after the consumer shuts down, and then prices start to decline. You eventually get the price decline, but the cost is high.
Since 2004 energy has been the leader. Sure the market posted a gain that year, but it took a tremendous surge starting in August to post that gain. As soon as the year ended it was back to another grind, losing those late 2004 gains and trying to set up for another second half run. All the while energy has been the clear leader, particularly in the sprint higher during hurricane season. During that period oil prices moved from high to very high with gasoline hitting $3/gallon immediately after Rita.
That was the zenith, however. Prices have slid since even as the majority of the Gulf production remains shut in to this day. Oil has buckled and is fighting to hold its 2005 up trendline, trading below $60/bbl intraday both Thursday and Friday. Big name oil companies, already struggling from the start of Q4, just underwent some extremely heavy distribution this past week as they undercut their 200 day SMA. That is an important point; the big money will either buy or sell at those levels. This week they were selling. As they underwent that heavy distribution oil prices quickly followed lower, threatening to break the up trendline for the year. The market anticipates the problems ahead and then sure enough the underlying product or industry follows.
Just an overheated market sector needing a correction or a sign of economic problems?
We touched upon this issue in the Thursday report: is oil simply consolidating after a strong run (it has not, after all, breached its trendline on the close), or is it ready to really fall, indicating itself that the economy is headed for rough times as a result of too high of prices?
The market started to peak to begin the current correction to start August. Energy stocks peaked at the end of September and crashed lower in October. Is the market suggesting that the economic expansion is over, done in by high and sustained energy prices? As we have said before, we will know more about that when we see how the market responds to that first test lower: if it bottoms and rebounds after the next test, it is likely not the end of the run. If it rolls over and dives again, that is not a positive indication for 2006. Right now it is trying to set the bottom.
We know that demand dropped off significantly when gasoline hit $3/gallon after Rita. Consumption dropped 3.7% in September, the largest decline in 10 years. Before that the consumer was shifting his habits, moving back toward discounters as it became more important to stretch dollars.
That, of course, does not mean that the economy is destined to implode. That is a natural reaction to spiking prices, but prices can spike and then turn lower because of an exhaustion or blow off top run in a market that quickly takes prices low enough to take the pressure off the economy and allow it to continue. That is what Steve Forbes believes. Or prices can spike and roll over because it simply became too much for the economy and price is falling because demand rolled over as a result of the sustained high prices.
So how is the economy doing?
The economy continues to look solid overall even with high energy prices and a Fed squeeze. As we have noted, however, there are signs of weakening even before the storms hit as regional manufacturing was volatile and business investment was stagnating some. The continued high energy prices and the recent barrage of rate hike mania from the Fed has exacerbated the situation. We talk with many in business, and one of the main fears is that the Fed will once again do what it always does: go too far and hurt the economy. To this day they still are holding back some because of all too clear memories of the Fed overacting. Indeed, the recent tough talk so closely mirrors past episodes of Fed missteps that many expect the Fed to overstep once more.
Despite all of the Fed talk and the continued high energy prices, there are still sectors of the market outside oil that are holding up well. If the market is the forecaster of economic troubles, then there are still indications the economy will be all right.
Many retail stocks continue to look awfully good in the face of weakening consumer confidence and high energy prices. Apparel is strong both in manufacturers and in stores. RL and GES look super in clothing. CHS, URBN, COST, CLE, DBRN in apparel stores are strong. CONN is strong in electronics stores and CC is not bad. Financial services have come to life, e.g. ET, TRAD, GS, MER, STT. Technology is also looking a lot better. Sure NASDAQ looks crappy overall as it still struggles to find bottom, but there are many tech leaders performing well, e.g. QCOM, AQNT, GOOG, SNDK, AAPL, LRCX. Those are sectors that do not perform well if the economy is heading lower. They are not the only leaders as well. Medical appliances and instruments, specialized healthcare, health care plans - - healthcare remains strong and it is not just a defensive play but can lead the market higher into good times as opposed to energy leading into hard times.
That leaves the same two issues, and they might just go away despite all of the glum views.
Thus as with the start of 2005, the Fed and energy remains the keys. As discussed energy is struggling to hold its trend and many be at the start of a significant decline. Yes a drop in demand here may have sparked it, but energy also ran irrationally higher as the storms hit. Some very smart market watchers view that run as the blow off top in oil and see prices down in the forties in the next few months. That would likely be low enough to help correct the excesses during the run higher if it does drop quickly. Confidence is restored in the consumer and businesses, pricing pressure drops, money is freed up to pursue other opportunities. There are so many that are so convinced oil cannot ever go lower again (Greenspan described oil as a ‘drag from now on’ with respect to the economy; talk about a defining utterance) that it is likely to do just that. It is threatening a breakdown, and if it moves below 60 it will find 55 in a hurry.
If oil does fall then perhaps the Fed will get off of the inflation love train and wind up its rate hikes. The market is still trying to recover from the recent onslaught of Fed-speak designed to soften up the front lines to ready everyone for more rate hikes than perceived. As much as we have been told the Fed has learned its lesson about back end loading rate hiking campaigns, one of the chairman wannabes and one whose name has been floated, amazingly, as a Greenspan replacement, just talked about the need for stronger rate hikes if deemed necessary. How ‘Fed’ can you get. This is the same playbook from 1999 and 2000 that lost us the game. Of course the Fed feels it won. When you deal with that kind of mindset you really wonder if there is a chance the economy can make it.
The Fed will have to stop its rate hikes before too long. Bonds started to rally again Friday, with yields falling sharply after approaching 4.5%. If the Fed raises rates on November 1, in December and again on January 31, the Fed funds rate will stand at 4.5%. If 10 year rates do not rise again the curve will invert. Greenspan likes to point to 1994 as an example of when the curve can invert and no recession follows. Yes, that is the one time it happened that way versus every other time resulting in a recession. With energy prices at levels far exceeding those in 1994, the comparison with 1994 is rather ludicrous. It is similar to me recalling the time I ran the 100 yard dash in 10 seconds flat as if I could do that today. I can barely ride a bike that fast today, but I am the same person.
To conclude, if oil falls into the low 50’s and preferably into the 40’s in a relatively short period (Q1 2006) and the Fed stops hiking no later than January 31 the economy may make it. What we are watching is how the market acts here as it tries to bottom and run toward year end. If it fails here and dives lower on strong volume, then it is indicating the combination of the Fed and oil prices have been and are going to remain too harsh for the economy to continue its expansion. If the market bottoms and rallies to the end of the year, it has bought some time to see how the Fed and energy play out.
THE MARKET
MARKET SENTIMENT
VIX: 16.13; +0.02. Holding steady after spiking intraday two weeks back. Still could use a spike over 18 to really do some good for the upside.
VXN: 15.82; -0.53
VXO: 15.87; -0.11
Put/Call Ratio (CBOE): 1.02; -0.03. Another close above 1.0. They are stacking up about two weeks solid, and in April that was just about when the market bottomed.
Bulls versus Bears:
Bulls and bears showed the jumps we were looking for though bears did not quite hit the 30% level seen in early May just after the market bottomed. There is still the next leg lower, however, to run that up and even past that level. Getting where they need to be to form a bottom here.
Bulls: 45.3%. Dropped slightly from 45.8%. After to consecutive 3.7 point drops bullish sentiment is leveling off. Wanted it to put in another strong drop to take it down to the May level. If the volatility continues this week it may get there. Bottomed in May at 43.5%.
Bears: 29.5%. At least the bears moved higher though just a 0.3% rise. Getting close to that 30% hit during the April/May bottom. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +14.1 points (+0.68%) to close at 2082.21
Volume: 1.827B (-2.5%). Volume was running higher early in the session as tech stocks rallied on a solid load of strong earnings. It could not hold up into the close even with it being expiration Friday. No accumulation but a solid above average volume session as NASDAQ held the 200 day SMA after that strong Wednesday move.
Up Volume: 1.099B (+564M)
Down Volume: 688M (-641M)
A/D and Hi/Lo: Advancers led 1.55 to 1. Back to mediocre breadth as NASDAQ put in an upside session. This remains the weak link.
Previous Session: Decliners led 2.15 to 1
New Highs: 60 (+1)
New Lows: 83 (-18)
The Chart: (Click to view the chart)
NASDAQ posted a gain but it was not another strong upside surge. NASDAQ started higher but had to fight to hold the 200 day SMA (2073) on the low, coming back in the afternoon session. Intraday NASDAQ managed to take out the 18 day EMA (2087), but it could not hold that small potatoes resistance on the close. It never did challenge the strong resistance at 2100. That said, it also managed to test and hold the 200 day SMA it broke back over this week after failing to retake that level earlier in the week when it looked ready to roll back over. A number of technology stocks continue to improve, joining the ranks of many of the smaller medical appliance/instrument and healthcare stocks that are on the index. The large cap techs and the smaller cap NASDAQ stocks are all moving together now, and that is helping given NASDAQ some internal strength it has yet to show on the outside. Now if you back out two years and look at the pattern, NASDAQ has formed an ascending triangle. If it can hold here above the 200 day SMA and rebound again it will have formed a higher low in the nice large base.
SOX (0.46%) continued its lateral move above the 200 day SMA (434.08) where it landed 8 sessions back. It probed higher Friday, clearing the 10 day EMA (444.53) intraday before fading back in the recent range. It is holding above the May/June lateral consolidation. As with NASDAQ it is gaining some strength here but still has plenty of work to do.
SP500/NYSE
Stats: +1.79 points (+0.15%) to close at 1179.59
NYSE Volume: 1.858B (-5.56%). Volume backed off on NYSE as well, but it still remained well above average as SP500 tested below its trendline once more and rebounded once more. Strong volume on the Wednesday follow through and continued strong volume to close out the week. You like to see volume as a stock or index tests key support; that often precedes a move higher.
A/D and Hi/Lo: Advancers led 1.94 to 1. Breadth was well above 2:1 intraday but then faded as the indices faded in the last two hours. As with NASDAQ, breadth remains a weak link for the NYSE indices.
Previous Session: Decliners led 2.97 to 1
New Highs: 34 (-11)
New Lows: 114 (-45). As one of our readers noted, the high/low differential on the weak sessions last week was much better than the prior week. That means fewer new lows as SP500 and SP600 tested the early October lows on Wednesday and Thursday. Fewer lows mean more stocks holding up, and that means more strength in the market overall.
The Chart: (Click to view the chart)
SP500 again flirted with the its August 2003/August 2004 trendline (1180), undercutting it on the low and rebounding to hang onto that level once again (third day in a row). It continues to hold this key level as it works to put in its own bottom to once more rally to test resistance at the 200 day SMA (1199) and price resistance at 1200. The large caps have lagged, but last week they put in a good test of the prior week’s low and rebounded. That low and test have set the move. Now we see if it can follow through on the follow through.
SP600 recovered the 200 day SMA (330.33) Friday as the small caps continue the back and forth action at this key level. One of the indices that showed the follow through Wednesday with its 2% gain, it is set to make the move this week. It tested the low two weeks back on Wednesday and recovered, very similar to SP500. Good test of that low to set up the rebound.
DJ30
CAT attack sent DJ30 lower on a strong shot of volume, pushing it back down toward the July intraday low (10,175), the point it tested intraday two weeks back. DJ30 could not catch a break last week, first selling on heavy volume from XOM and CVX, and then with CAT on Friday. It turned back at the 50 day EMA (10,425) last week, making a third lower low in this 3 month decline. This is where the rubber meets the road for DJ30.
Stats: -65.88 points (-0.64%) to close at 10215.22
Volume: 357M shares Friday versus 334M shares Thursday. Each session DJ30 gets hammered by one stock, and Friday it was CAT.
The Chart: (Click to view the chart)
MONDAY
This week the Fed gets some data on existing and new home sales and the employment cost index. As the Fed is focused on housing and so-called ‘wage-based’ inflation, it will have something more to talk about. It won’t change the Fed’s mind, but it will give it something to take to the streets again. In addition there are a couple of consumer confidence reads, durable goods orders, and the advance GDP. And of course there are a boatload more earnings reports.
The market is setting up to make its decision on the bottom and a rally into the year end. If you sat down and quickly looked at the indices and their patterns you would have to say the market is in trouble with the lower highs and early October distribution. Trowel on the energy prices and the Fed and the new Fed street talk and it is really worrisome.
You cannot ignore that pattern and the issues still facing it, but as we have detailed above and last week, there is some strength trying to emerge. It often comes when things look pretty crappy, and if you have not noticed, things look pretty crappy. Energy prices, the Fed’s new tough talk, the October distribution, worries about storm recovery costs, worries about inability to push pro-growth policies in DC, flagging consumer confidence - - take your pick.
So, there will be more economic data out there that could influence the action, there will be a ton of earnings that will definitely influence individual issues, and there will be more Fed-speak, but less because there is an Open Mouth meeting on November 1; they wanted to do it on Halloween but they figured that day was spooky enough. That might push the market a bit faster in the direction it has chosen but from what we are seeing it looks as if it has already made up its mind to try a run higher barring some really nasty unexpected news.
We still might see some volatility this week as well. The market can show a follow through and still take some time to get its ducks all in a row for the bigger move. As we were looking for last week, there are indeed leaders still holding the fort after the Wednesday intraday test low and rebound follow through. We are going to continue looking at those to provide us the vehicles to ride a run to year end.
Support and Resistance
NASDAQ: Closed at 2082.21
Resistance:
2100 was key resistance and support in the past
The 50 day EMA at 2111
The 50 day SMA at 2124
2154 from January 2004 high
2178 is the January closing high
2187 is the September high.
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
The 200 day SMA at 2073
2050-51 is price resistance from spring and summer 2005 consolidations
2018 is the early April high.
The August 2004/April 2005 up trendline at 2018
S&P 500: Closed at 1179.59
Resistance:
The 200 day SMA at 1199
1200 was solid price support at one time
The 50 day EMA at 1207
1210 held in late September on the close.
The 50 day SMA at 1213
December 2004 high at 1219 and June high at 1220
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246
Support:
1183 – 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1179.50 is the August 2003/August 2004 up trendline.
1165 – 1155 from late 2001/early 2002 double top
Dow: Closed at 10,215.22
Resistance:
10,350 turned out to be support in the recent August and September pullbacks
The May high at 10,406 and 10,400, the bottom of the November/December range
The 50 day EMA at 10,440
The 200 day SMA at 10,509
Price consolidation at 10,600
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move. This is the key resistance.
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
10,250 held in the June and July lows
10,200 from April.
10,175 from the July intraday low.
10,000 from the April low.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
October 25
- Existing Home Sales, September (10:00): 7.20M expected and 7.29M prior
- Consumer Confidence, October (10:00): 88.3 expected and 86.6 prior
October 26
- Crude Inventories, 10/21 (10:30)
October 27
- Durable Goods Orders, September (08:30): -1.5% expected and 3.4% prior
- Initial Jobless Claims, 10/22 (08:30): 340K expected and 355K prior
- Help-Wanted Index, September (10:00): 35 expected and 35 prior
- New Home Sales, September (10:00): 1250K expected and 1237K prior
October 28
- GDP-Adv., Q3 (08:30): 3.6% expected and 3.3% prior
- Chain Deflator-Adv., Q3 (08:30): 2.9% expected and 2.6% prior
- Employment Cost Index, Q3 (08:30): 0.8% expected and 0.7% prior
- Michigan Sentiment-Rev., October (09:45): 76.0 expected and 75.4 prior |
