InvestmentHouse Weekend Update:
investmenthouse.com
- Nice easy session as stocks test some, rally to the close.
- Employment surveys again contradict during a period of transition.
- Inflation's future still questionable but enough to keep the Fed going.
- Stocks setting up well for a continuation of the rally next week.
Market pauses, sort of, after a solid week of gains.
The character of the market can change in a hurry, at least that is the way it often appears to the casual observer (and indeed the more seasoned investor). Friday stocks were weaker, but even in that weakness they sold only modestly and then rallied in the last half hour. That shows the change in character: when buying is slow stocks refuse to give back gains (showing very few sellers), and they close with an upside flair.
It was not long ago that stocks sold off no matter what the news was, and quite frankly, most of the news was bad. It was so gloomy we noted almost nightly how sentiment was reaching levels that could turn the market. It was not, however, an overnight transformation. You all were there each session from mid-October when the market was going through that bottoming process, taking a step forward and then getting swatted right back. That kind of grinding action along with the gloom crescendo worked to weed the market pretty well, getting rid of enough marginal players to set the stage for the rebound. The market was edging higher as it built the bottom, but to hear the financial stations you would think it was heading down into the inferno.
Thus when the volume surged and stocks broke higher with the leaders running interference, it seemed as if a switch was thrown one day and stocks rallied. We know that was not the case, but we also know that when the gloom was high and the news kept getting worse we were seeing strong stocks move higher. More than that we were buying into those moves because we saw the bottoming ongoing and we know that when you see the moves you have to act regardless of what your guts are telling you. When the move really got some legs under it this week we had the luxury of watching our positions run higher, pushed by those piling into the market.
Stocks hold tough on a 'weak' session.
Friday's action was slower as expected ahead of the weekend and on the heels of a strong run for the week. Stocks sold early with the indices turning negative, but the selling never really got out of hand. They bounced midday but then weakened again in the last two hours as the weekend approached. Once more, however, they did not sell much, holding above the early session lows and doing so on much lighter volume (25% lighter).
When they held again that started another round of buying and some more short covering, and the indices jumped higher in the last thirty minutes. That turned a lazy test into a modest gain. Instead of closing on the lows stocks are now finding buyers late and closing near the highs. That is a much more bullish mindset.
Even if stocks had closed near the lows, however, it would not have been a negative session. Yes volume was sharply lower, but even with the losses stocks would have held most of their gains. A stingy market is what you like to see because it means none of the recent buyers are ready to sell at this price. Indeed, as seen Friday they used the second dip of the session to move in and buy stocks into the close.
The small and mid-cap indices did not join in, at least they did not recover to positive by the close. That left SP600 negative, but it sure looks like a very nice test of the 50 day SMA and a rebound; that leaves SP600 basically in position to resume the move on Monday. NASDAQ rallied back and posted a 9 point gain. Nothing great, but we would have preferred a bit more test of that gap higher. Not as nice a test, but NASDAQ may not be ready to even think about coming back at this point as it has been the leader on the entire move.
In sum, stocks did just what you want after a good move and before the weekend, easing back on light trade and then showing the same bullish characteristics that got them this far with a late bump higher. Many leading stocks that broke higher recently were testing back as well, and that will provide us some solid entry points on strong stocks in the coming week. We love to add to positions when a strong stock tests a move and heads back up. That keeps us in winners and focuses our money on stocks more likely to make us money.
THE ECONOMY
October jobs report shows storm related losses but more people say they are working.
October non-farm payrolls were a disappointing 56K (100K expected) as the Labor Department indicated workers are still sidelined by the three storms that raked the Gulf coast in September and October. September was revised higher to an 8K loss (-35K originally reported), but August's robust 241K pre-storm reading was sliced by roughly 35K jobs, indicating the jobs market was not quite a strong as thought heading into the eye of the hurricanes.
The Labor Department also indicated that the October malaise was not entirely the result of the storms but of a below trend jobs growth rate across the country. But why was the rest of the country below trend? Could it be that closing major ports and the Mississippi river as well as the uncertainty following the storms (as reflected in the New York and Philadelphia PMI indexes) caused businesses to hesitate a bit? Of course it did. Thus to say that the less than expected job creation was not storm related is misleading. It may not have been directly attributable to the storms (e.g., a company in the affected region tried to reopen but could not do so just yet) but if a company holds off hiring because it is uncertain how the storms might impact its business, well, that is related to the storms.
Further, as we noted last month, you also have to question the efficacy of the polling method at this point. So many businesses are still in flux in the four impacted states that results are likely widely divergent from fact. It will likely take until the end of the year and we see how the holiday season hiring pans out before we can get a real idea of the employment picture.
Then there is also the household survey or the 'other' polling method, the one where the workers are asked if they have a job as opposed to the employers. That dropped the unemployment rate to 5% from 5.1%. While part of that drop is due to a large chunk of workers removed from the workforce, when you look at those responding 'yes' to the question of whether they were working, 241K more said they were indeed working.
This is the same incongruity that the data showed as the economic recovery gained steam. The employer survey showed lackluster creation, the household 'are you working' survey showed strong creation. The Fed said the non-farm was correct, but when the economy is changing the employer survey underestimates workers.
We were and are moving from the large corporation and 'upstart' technology firms of the 1980's and 1990's. Those upstarts are now the huge, mature corporations that are trying to keep profitability up as their growth curve declines dramatically. They do that by shedding jobs wherever possible. When the big corporations are firing, it is up to the small companies, the new upstarts, and individuals to find their jobs. That is what many Americans have been doing in this recovery given the nature of the change in the leaders of the past two decades that are not mature industries. It is up to the next wave of smaller, faster growing companies to fill the jobs void, and the economy is still in the process of germinating those jobs.
That leaves us with a jobs report that is probably not as weak as the headlines suggest, but it was still no major breakthrough. Not bad given the storms, but there is still a long way to go in the recovery and in the polling process as well.
Inflation indications: some say yes, some say no, all keep the Fed on track.
This discussion needs to be prefaced by the statement that some of the Fed's inflation indicators simply are not good indicators. There is a Phillips Curve belief that too much employment leads to inflation. Part of the reasoning underlying that conclusion deals with wages and employee costs. If unemployment gets low and employees demand more wages then there is price pressure as more dollars chase the same amount of goods and services and as employers raise prices to offset the higher employee costs.
History and common sense show that is not the case. If businesses are allowed to freely move capital to meet demand needs, it will do so because that is where it can make the most money: if there is demand for a certain kind of chair, that is where the extra money goes to make more to meet that demand and thus increase sales and profits. Thus more demand brought on by more money to spend is met with more supply. If a company decides it is just going to raise prices it will be quickly outmatched by a more aggressive company that wants to grow its business and sales and ramps up production and makes up its higher costs with more sales. Growth is always the way out in economic decisions.
The jobs report saw a 0.5% gain in hourly wages (0.2% expected), and that had the inflation tongues wagging. Of course it was likely due to the storm related elimination of many lower paying jobs. When you take out the lower end you raise the overall average. That is what this number says, nothing more.
The supposed wage rise conflicts with other pertinent employment data out earlier in the week. As seen Thursday, unit labor costs fell 0.5% versus an expected 0.2% gain. Costs are down but wages are up? Did benefit costs just drop through the floor? Hardly. Productivity is surging as well; employers get more out of their employees, reducing the cost of goods. Even if wages are rising, which they are not, they are being at least offset. Throw on top of that the decline in the core PCE deflator and you have a hard time driving home the argument that wage-led inflation and demand inflation are running away.
Yes there is inflation in this cycle, and that is due to the backwards incentives used to get the recovery going. Demand was already stronger on the consumer side back in 2000 when the foolish tax 'rebates' were given to consumers (how do you get a rebate if you didn't pay any taxes? The same way you are labeled a vigilante because you see someone breaking the law by crossing the border illegally and call the police on them. Would you be a vigilante if you saw someone robbing a bank and called the police about it?). That only charged demand more and sowed the seeds of inflation. The supply side tax cuts were too late in coming and were too little to overwhelm the start of inflation. Thus we have to deal with the issue, but it is also a matter of quantifying the danger. We have gone for so long without inflation that we panic at the first signs.
You may be about ready to give up on this, but consider one thing: in the late 1990's Greenspan and the Fed were very concerned about what they called the 'wealth effect,' a theory that concluded when consumers 'feel rich' either through stock market gains or high wages (or both) they would spend more; another variation of the high wages equals inflation idea. There was no proof of this, but the Fed steadfastly used it on every possible occasion as justification for raising rates until the market collapsed and the economy fell precipitously into recession. After the fact, Greenspan in a speech admitted the Fed was not sure if the 'wealth effect' actually existed and requested input form citizens, etc. to determine if it did. All of that pain and lost retirements based on a theory that the Fed was not even sure about. Given that 'wage-led' inflation is no more factually based than 'wealth effect' inflation, sober men have to take pause when the Fed appears so determined and focused with respect to raising rates.
Dollar strengthens, and that helps inflation pressures.
A rejuvenated dollar climbed to a 1.5 year high against the euro this week, hitting the 1.18 level. That is a key point and a breakthrough sends the dollar appreciably higher versus the EU coin. The dollar is in an 18 month reverse head and shoulders base and started to breakout Friday.
The significance: a stronger dollar makes foreign goods cheaper for our consumers, known for their penchant for foreign goods. Instead of importing higher prices we are enjoying more buying power. Of course that will have the trade deficit hawks going nuts as we buy more, but that is what we have always done and always will do.
THE MARKET
MARKET SENTIMENT
Market sentiment, at least when you hear from the floor traders and the financial stations, turned quickly from gloom to positive. This is not a swing to an extreme in bullish sentiment, but note that the talk of a turn to bullishness Thursday and Friday coincided with a pause in the market. This is a microcosm of the larger sentiment moves when bullishness or bearishness does get to extreme levels near market tops or bottoms. You need to see supporting indicators to show an extreme. This is, however, a good learning example as to how sentiment, once it can be perceived as a general market bias, plays a role in market moves.
VIX: 13.17; +0.17
VXN: 15.18; -0.47
VXO: 12.51; +0.14
Put/Call Ratio (CBOE): 0.88; -0.05
Bulls versus Bears:
Bulls: 46.4%. After a month-long decline to 44.8%, bulls started back up on the heels of the bottom and the gains put in since. Never got as deep as the May low at 43.5%, but good enough to get this move started. Bottomed in May at 43.5%.
Bears: 26.8%. Sharp drop in bears as well, down from 29.2%. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +9.21 points (+0.43%) to close at 2169.43
Volume: 1.734B (-26.1%). Volume dropped off sharply as NASDAQ sold modestly through the morning and into early afternoon. That showed few sellers as NASDAQ showed some price weakness. Low volume breather, just what was needed as NASDAQ price/volume action remains very solid.
Up Volume: 1.06B (-430M)
Down Volume: 656M (-180M)
A/D and Hi/Lo: Advancers led 1.04 to 1. Meek all session but no worry. This is just what you want to see.
Previous Session: Advancers led 1.23 to 1
New Highs: 97 (-85)
New Lows: 58 (+8)
The Chart: (Click to view the chart)
NASDAQ was lower early on, but it never threatened support, tapping at the January 2004 high on the session low (2155). It rebounded from there and rallied well into the close. Volume faded back below average on the move, very good action on the early selling and what you want to see when an index takes a rest. That is what it did Friday, easing into the weekend with a gain as its day of rest. It is being very stingy with its gains, indicating no sellers are in the market. It was a test of the resistance it gapped over Thursday but there is still that gap to deal with. It is in the leadership of the market, however, and given the strength shown Friday on a 'weak' day it is likely not going to fill it just yet.
SOX cleared the 50 day EMA (451.04) and held it on the close despite a dip lower intraday through that level. It is holding over the December 2004 high here, trying to use that as support as well, tapping there on the intraday lows the past two sessions. Good gap higher Thursday but still in a precarious position.
SP500/NYSE
Stats: +0.2 points (+0.02%) to close at 1220.14
NYSE Volume: 1.52B (-23.71%). Lower, below average volume as the NYSE indices tested lower and then held flat, holding the Thursday gains. Nice dip lower on low volume and then a recovery. The low volume on a flat close is not a bad thing; the rebound shows the upside bias in the market. Great price/volume action now.
A/D and Hi/Lo: Decliners led 1.13 to 1. The small and mid-caps were under pressure all session, and that kept the breadth negative. Nothing nefarious on Friday.
Previous Session: Advancers led 1.06 to 1
New Highs: 70 (-110)
New Lows: 88 (+2)
The Chart: (Click to view the chart)
SP500 closed flat after a good test lower intraday that easily held above near support at 1200. Very good session of rest, and it could use another day or two of lateral movement to really set up the next run higher. When the market is making a strong move, however, it tends to truncate its rest periods. Thus we are going to look for a bit more softness Monday and then the start of a rebound to continue the move.
SP600 already looks ready to move back up. It tested near the 50 day SMA (341.61) on the intraday low and rebounded for a modest loss. It may test again to start the week but this is solid action, a low volume test and recovery to close flat setting up the next move higher as it shakes out a few more sellers with that intraday dip lower.
DJ30
DJ30 managed to hold its break back above the 200 day SMA (10,498), dipping below that level intraday and then recovering on the close. That is the same shake out action as on SP600, and it helps solidify this level as support for the next move higher. DJ30 is still in the heart of its 7 month range that runs form 10,200 to 10,700. This action is setting up the next move that will attempt to take on the highs in the range at 10,700.
Stats: +8.17 points (+0.08%) to close at 10530.76
Volume: 230M shares Friday versus 320M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
Earnings season is not over as it now runs into November, though it is slowing considerably. The economic table is lighter: export/import prices, trade balance, Michigan sentiment, Treasury budget. They are likely to play marginal roles in the market movement.
More important is the new character of the market, the strong price/volume action, and solid leadership. When the market decides to move definitively in one direction, up or down, it typically takes all news in a certain way, i.e. it finds the positive in all news when it is rallying and it finds the worst in all news when it is selling. That is why we really liked the action we saw Friday with the indices dipping modestly lower on low volume and then rebounding. Action in strong stocks was similar, and this pullback is setting some early solid movers up for the next rebound and move higher. We love taking advantage of those breakouts that are being tested as it takes a lot of the risk out.
There are some other issues that could hamper the move, one being what we discussed Thursday with interest rates and their rise toward a breakout in the 10 year. After pushing against them for over almost 1.5 years and resisting the entire time, rates are threatening to break to the upside. The market did not want them to go up, but when a dam finally gives the results are often catastrophic. In this case that means rates running higher near 5% in a short period of time. That is just the initial thrust. After that, as the damn is broken, they continue to trend higher after holding flat for a long time.
This is the typical reaction when this type of pressure is applied. Recall every time an administration monkey's around with the dollar, thinking if they get it to fall it will result in a surge of exports and less imports. It never really works. What happens is they continue to undermine the currency and eventually it knuckles under. Once the slide starts it is hard to turn it when the administration thinks it has gone far enough. It then has to run its own course, and turning it back is as difficult and long a process as starting the slide in the first place.
When rates breakout they will have to run their course. Higher rates will mean the housing run will be over. The question is whether it will crash or continue to ease back. The Fed has it in its sights, and that is always dangerous because the Fed almost always goes too far with its special purpose. Much depend upon how high they rise, how much inflation there is in the economy. Remember, the Fed is trying to fight inflation with higher rates, slowing the economy down to achieve its goal. Very clumsy way of doing it but that is what we have to deal with in the market.
That is likely not to happen this week but it is ahead for the market as the year winds down and into 2006. For now the market has set the stage for a solid rally off this level, one that has already started. This week we are looking for opportunities in strong stocks that are taking a pause to close last week. A strong move off the October lows to either breakout of a base or set up a breakout, and now a test or shakeout before the next move. That provides a solid entry point to take advantage of as stocks gear up for a further run toward the end of the year.
Support and Resistance
NASDAQ: Closed at 2169.43
Resistance:
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:
2154 from January 2004 high
2120 is the August downtrend.
The 50 day EMA at 2114
2100 was key resistance and support in the past
The 200 day SMA at 2074
2050-51 from spring and summer 2005 consolidations
2025 is the early October low
2018 is the early April high.
The August 2004/April 2005 up trendline at 2025 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1220.15
Resistance:
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 August high at 1246
Support:
1210 held in late September on the close.
The 50 day SMA at 1209
The 50 day EMA at 1206
1200 was solid price support at one time
The 200 day SMA at 1200
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1185 is the August 2003/August 2004 up trendline
The October intraday low at 1168 is a key point to watch
1165 - 1155 from late 2001/early 2002 double top
1140 from the April low
Dow: Closed at 10,530.76
Resistance:
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:
The 200 day SMA at 10,498
The 50 day EMA at 10,422
The May high at 10,406 and 10,400, the bottom of the November/December range
The 18 day EMA at 10,400
10,350 turned out to be support in the recent August and September pullbacks
10,250 held in the June and July lows but is blowing out now
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.
November 07
- nsumer Credit, September (15:00): $6.0B expected and $4.9B prior
- Wholesale Inventories, September (10:00): 0.4% expected and 0.5% prior
- Crude Inventories, 11/4 (10:30)
November 10
- Export Prices ex-ag., Oct (08:30): 1.1% prior
- Import Prices ex-oil, Oct (08:30): 1.2% prior
- Trade Balance, September (08:30): -$61.0B expected and -$59.0 prior
- Initial Jobless Claims, 11/05 (08:30): 325K expected and 323K prior
- Michigan Sentiment-Prelim., November (09:45): 76.5 expected and 74.2 prior
- Treasury Budget, Oct (2:00): -$50.0B expected and -$57.3B prior |
