InvestmentHouse Weekend Update:
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- Volatile expiration but stocks post another gain as SP500 hits new 2005 high.
- Market pushes higher, anticipating economic growth despite Fed, oil, gold, yield curve.
- Another light week for economic data on a shortened trading week as market tests new 2005 highs, works on continued year end run.
SP500 joins the breakout to new 2005 highs after up and down session.
Stocks roared out of the gate in a continuation of NASDAQ’s Thursday break to a new 2005 high (notice how the last two big moves came on Thursday?) with SP500 joining the breakout. The early rally was sparked by excitement over the breakout, some solid foreign market action, and some solid tech earnings. It was expiration Friday, however, and despite the upside momentum, volatility returned. Indeed, it was too strong a move and it burned itself out 45 minutes into the session. Stocks turned over and SP500 gave up its breakout.
Stocks spent the next four hours moving laterally with SP500 below its 2005 highs. As the session moved into its last hour, the bullishness returned and SP500 moved back through resistance to post a new closing high for 2005 and since the October 2002 low, joining NASDAQ with that breakout. Semiconductors were strong as well, gapping higher with SOX (2.5%) moving toward its 2005 highs as well. The small caps (0.54%) joined in as well, though they too were below the 2005 highs.
Volume was strong given expiration, topping 2B on NASDAQ. Breadth was so-so at 1.5:1. It was not a powerful session, but we saw the strength on Thursday when NASDAQ made its breakout and started the process. The modest breadth did not provide a lot of new breakouts, just an overall continued move higher by the market. No complaints, however, as the market heads higher on its year end run.
THE ECONOMY
Market rally suggests continued economic strength even with Fed, energy prices.
The market looks down the road, not at what is happening today. It moves based on what it anticipates will happen in the future. Thus the breakouts to new post 2002 highs indicate that despite the Fed rate increases (and the purported continued hikes to come) and despite continued high energy prices, show the market is factoring in some continued economic growth and that means continued earnings growth, enough to justify higher stock prices.
The market is not infallible. It moves based on the consensus of all investors, the collective of all information regarding the economic future. What it is pricing in now is that the Fed will not continue hiking rates too far and that oil will continue its decline toward more sustainable levels, economically speaking. The market was factoring this in late in 2004 and the market broke higher, also to post-2002 highs. The market was wrong and it figured it out right at the start of 2005. It sold off and had to work on rebuilding to this point once more. As the end of 2005 approaches the market is again sizing up all the data and figuring out where it goes from here.
Con number 1: Is gold signaling inflation still to come?
Gold surged the past week, hitting a new all-time price high and continuing a run that really started strong in the summer. Gold is typically an inflation indication: investors buy gold as a hedge against inflation that eats away the value of currencies. Thus the rise in gold is interpreted by many as an indication of inflation.
While you always have to be hesitant to say things are different this time, there are some interesting features at work that have not been in the mix before. First, bond prices are not rising, a typical situation when inflation is present. The bond market is one of the best indicators of inflation, and it is not surging higher. Indeed, it appears the 10 year bond peaked for this cycle two weeks back at 4.66%, roughly matching the high from the summer. In addition, the dollar continues to surge higher, breaking out and making a higher low the past week. That is also not a typical sign of inflation: as noted, inflation weakens a currency and the dollar is gaining strength.
There are simple demand factors accounting for much of the rise. Chinese and Indian populations are enjoying heretofore unknown wealth, and they are exploring that new found strength by adorning themselves with gold. Seems hard to believe, but with the massive populations in both countries, this new found appetite for jewelry is explosive. That is what the gold experts are telling us: unprecedented consumer demand in Asia.
Another factor adding to gold’s rise is the recycling of petro-dollars into some gold. That $60/bbl oil is not only buying US securities, it is buying some gold as well. That only increases the price pressure.
Con number 2: What about the flat yield curve?
Greenspan has said he feels the predictive power of the bond yield curve has diminished and thus as part of his ‘conundrum’ he does not place to much emphasis on the flattening curve. Of course he does not say how far diminished the predictive power is. We have the definite feeling, just as with the Fed’s not so certain beliefs about the so-called stock market wealth effect that it used as a basis for raising rates to the point where the economy broke in 2000, that the Fed and Greenspan do not know just how much of a change there has been.
Now Greenspan is partially right. There is a lot of recycling petro-dollars into US treasuries and that is helping depress bond rates. But if you look at the facts, it is not as great today as it has been in the past. The recent data tells us that buying of US treasuries has dropped to third place behind purchasing corporate securities and US equities. Thus while purchasing continues, it is not the main factor depressing bond prices.
Thus we still view the flat bond yield curve (10 BP between the 2 year and 10 year bonds) as a potential problem. A flat curve suggests slowing economic growth; an inverted curve typically indicates a recession. The depressing impact of heavy foreign buying may indeed be pushing the curve flatter than the economic activity would normally have it, but it is impossible to quantify the impact (have you heard Greenspan do so?), and thus it is close enough to be of real concern as we head into 2006. For now the stock market is not suggesting a slowdown, but the bond market is the primary predictor of future economic activity, and as discussed above, the stock market can get it wrong as in late 2004.
THE MARKET
MARKET SENTIMENT
VIX: 11.12; -0.13. Heading down to the lows of the year just as the market breaks to highs for the year. Not necessarily an indication that the upside move is over, however, as volatility can continue to fade even as the market continues higher.
VXN: 14.36; +1.08
VXO: 10.55; -0.45
Put/Call Ratio (CBOE): 0.62; -0.09
Bulls versus Bears:
Bulls: 53.1%. Another strong surge higher from 50.6% as bulls head toward the 55% level that indicates an excess number of bulls and alerts you to watch for signs of deterioration in the price/volume action and leadership. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.9%. Down from 24.7% and heading toward the 20% level that is considered bearish as too few are skeptical of the market. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: +6.61 points (+0.3%) to close at 2227.07
Volume: 2.061B (+9.34%). Volume surged well above average on expiration Friday. Given expiration the increased volume is not necessarily a great indication of continued accumulation. Given the market behavior during this rally, however, it would be wrong to assume it was not good price/volume action.
Up Volume: 1.258B (-168M)
Down Volume: 767M (+370M)
A/D and Hi/Lo: Advancers led 1.52 to 1. Not a dominating day from a breadth standpoint, but Thursday’s strong session showed plenty of strength on the breakout, and that is when you want to see it.
Previous Session: Advancers led 2.71 to 1
New Highs: 174 (+51). Still lagging even as NASDAQ moves higher on its breakout.
New Lows: 52 (-17)
The Chart: (Click to view the chart)
NASDAQ surged on the open, gapping higher on a lot of enthusiasm following the Thursday breakout to new post-2002 highs. It could not make any headway and close mid-range for the session. It held its gains, but stumbled around all session, unable to sustain any move. It is holding above its 2005 highs (2220), but has not put a lot of distance on them yet. Bigger picture, it has broken out of the two year ascending triangle, and that is potentially a very strong indication for the index moving forward as it moves into 2006. Of course, that depends upon the factors discussed above; the market looks solid for now but it still has issues to work through as it moves into the new year.
SOX (2.5%) was strong Friday, gapping higher and probing the 2005 highs (486.34; hit 481 on the high). A strong move off of the support at 460 that it broke through and tested the past week. SOX has a big job ahead of it, i.e. breaking through those highs, but the other indices are shooting them down one by one, and SOX is showing great strength after waking up once more.
SP500/NYSE
Stats: +4.47 points (+0.36%) to close at 1247.27
NYSE Volume: 1.799B (+6.18%). A strong volume session on SP500 as well as the index broke through the 2005 highs. Expiration for sure, but a solid move nonetheless.
A/D and Hi/Lo: Advancers led 1.48 to 1. As with NASDAQ, a very tepid level, but the heavy lifting was done Thursday.
Previous Session: Advancers led 2.94 to 1
New Highs: 187 (+31)
New Lows: 134 (-42)
The Chart: (Click to view the chart)
SP500 joined NASDAQ Friday, making a breakout above the 2005 highs (1246) and hitting a new post-2002 high. Strong moves Thursday and Friday off of the nice test of the 10 day EMA (1231.62). A solid break higher and this week we anticipate a bit of a soft start before trying to put some more distance on the highs. After that the inevitable test will come. Thus far the index is showing superb technical action as with NASDAQ.
The small cap SP600 (0.54%) posted the second best move of the day, following on the heels of its market leading 1.8% gain Thursday. It has broken out from the handle of its October and November double bottom with handle base, but it still has a way to go for a new high. A high at 353, 355 and then the 2005 high at 357.86 all stand in the way, and when SP600 gets there it is likely to need a rest before trying the breakout move.
DJ30
Strong volume Friday, helped by the HPQ and its earnings, as DJ30 made a more definitive push through the 7 month range that was bounded by 10,720 on the high. DJ30 made it to next resistance at 10,800 on the high before peeling back some to close. A solid break through a barrier that held the index in check most of 2005. Still a long way to go to get to the 2005 high at 10,985 hit back in March.
Stats: +46.11 points (+0.43%) to close at 10766.33
Volume: 351M shares Friday, the strongest since the October bottom.
The Chart: (Click to view the chart)
MONDAY
Another relatively light load of economic data this week, but some important data nonetheless. The leading economic indicators are somewhat important, but the focus will be on the FOMC minutes and Michigan sentiment. Of course, oil and natural gas inventories will be watched again as oil continues its slow decline (closed at $56/bbl Friday). It is working its way lower but as we noted last week, it is a grudging decline. The market is in part banking on a continued decline into the new year. After breaking its trendline just over a week ago, we wanted a harder drop. It is not giving it up yet.
NASDAQ, SP500 and SP400 (mid-caps) have made the breaks through the 2005 highs, and SOX and SP600 are heading to a showdown. Likely as not, the former will make more of a move higher while the latter continue their advance on the highs. When they get near them the market will be in need of a breather. At that point you want to see NASDAQ and SP500 hold their breakouts while SOX et al pull back to near support. Then another break higher in action very similar to what NASDAQ and SP500 did the past two weeks.
The week of Thanksgiving tends to be calm and tends to provide upside in light holiday trading. Closed Thursday and open half a session Friday. If we see good moves from stocks that are set up to break higher we will look at taking positions. Primarily we let our positions run during this week, and if they get close to targets or put in good runs we like to take some of the gain off the table. As always, we like to take advantage of what the market is giving, and Thanksgiving week tends to give us an opportunity to take some gains in positions we have cultivated during the rally to this point. If we see some great moves we won’t back off from them as we anticipate a continued rally into the end of the year.
Support and Resistance
NASDAQ: Closed at 2227.07
Resistance:
2251 is the January 2001 low (2273 is the closing low)
2264 from the June 2001 peak
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2220 is the August high
2205 was intraday resistance last week 2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
The 10 day EMA at 2192
The 18 day EMA at 2171
The January 2004 high at 2154
2144 is the October gap up point.
The 50 day EMA at 2141
2100 was key resistance and support in the past
The 200 day SMA at 2082
S&P 500: Closed at 1248.27
Resistance:
1273 is the May and May 2001 peaks
Support:
The August high at 1246
The September high at 1243
The recent highs at 1238
The 10 day EMA at 1231
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
The 18 day EMA at 1223
The 50 day EMA at 1214
1210 held in late September on the close.
The 200 day SMA at 1202
1200 was solid price support at one time
1190 from prior prices
Dow: Closed at 10,766.33
Resistance:
10,868 is the December 2004 high
10,985 is the March high
Support:
10,754 is the February high
10,720 is the high in the recent lateral move. This is the key resistance.
The June highs at 10,646 to 10,656
The 10 day EMA at 10,653
The 18 day EMA at 10,584
Price consolidation at 10,600
The 200 day SMA at 10,505
The May high at 10,406 and 10,400, the bottom of the November/December range
10,350 was support in the recent August and September pullbacks
10,250 held in the June and July lows but is blowing out now
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
November 21
- Leading Indicators, October (10:00): 0.8% expected and -0.7% prior
November 22
- FOMC Minutes, November 1 (2:00)
November 23
- Initial Jobless Claims, 11/19 (08:30): 310K expected and 303K prior
- Michigan Sentiment-Rev., November (09:45): 80.5 expected and 79.9 prior
- Help-Wanted Index, October (10:00): 39 expected and 39 prior
- Crude Inventories, 11/18 (10:30): -2159K prior |
