InvestmentHouse Weekend Update:
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- Stocks close out the week on downside, in the consolidation range but struggling.
- Current account gap declines, but again it is storm related.
- Fed said it needed more data, and this week it gets it.
- Santa better get on the stick if this rally is going to continue.
Try as they might, stocks cannot put together a rally.
Okay, they didn’t try that hard. Futures were up solidly, up over 5 points against fair value. Stocks told the story on the open; they were not out of the blocks as strong as the futures were up. It did not take long for the early and very modest gains to dissipate. After showing a return to some bullish action early in the week, the market reverted to more bearish intraday action Thursday and Friday, i.e. starting higher and closing lower.
Volume was up big even for expiration when compared to recent expiration sessions. This was quadruple expiration and the NASDAQ 100 rebalance; thus the very strong volume was not that unusual. It was about all that was excessive on the session. The losses were modest, running well below 1%. Breadth was very modest, just slightly negative. Not bad given that the small caps were struggling once more.
Indeed, that was the main negative for the session: more struggling stocks. SP600 has been fighting the consolidation the past two sessions. It managed to hold up but it is battling. Energy was weak, chips struggled, and there are more stocks breaking near support. It is very hard to quantify that given a rebalance in addition to the quadruple expiration. You basically have to see the action early the following week to determine what was position shuffling and rolling over to the next expiration as opposed to the desire to dump stocks.
To this point the action has been super with respect to price/volume action and leadership, but bullish sentiment is getting extreme, stocks are starting to stumble around, SP600 is fighting, and of course, the indices have been unable to make the breakout when it has been staring them in the eye. The expiration is now a done deal, and this is the point the market has to show us it is ready to continue the move. It has had a three week consolidation to digest the November run, and it is at the lick log point this week.
THE ECONOMY
Current account deficit shrinks more than expected thanks to storms.
It is a perverse way to claim things are getting better. The current account gap, the broadest measure of all trade between the US and other countries (it includes investment inflows in addition to exports and imports of goods and services), fell to 6.2% of GDP after a 6.4% reading in Q2 and 6.5% in Q1. The primary driver of the fall was due, as in other areas of late, to the late summer storms. Lots of property damage was done, and there was a lot of risk spread overseas. Insurance payments from those losses came in, and that inflow is accounted for in the current account balance. In addition, donations came in and that also shrank the gap.
That obviously is an extraordinary event. The less extraordinary event involves petroleum imports. That goes under the heading of goods, and the goods imbalance grew by $11B to a new record ($197B and change). Petroleum products accounted for 80% of that increase. Remember, we had to import a lot more oil after the storms shut in the majority of Gulf production, and thus the surge in product imports. Thus the narrowed gap is likely not to stay that way.
Those damn consumers are to blame.
Even if it did it would not be enough to placate many economists. The buzz is that even at the lower 6.2% of GDP the gap is still too high and that if foreign interests lost interest in investing in the US then suddenly we would have to take action, driving up interest rates, devaluating the dollar, and sending inflation surging. Who do they blame? You and me. Yep, we consume too much and save too little. The idea must be we need to stop buying foreign goods and put that money into savings accounts. Why can’t we be like Japan they opine, saving a lot and buying little? Gee, that did wonders for Japan’s economy the past 15 years as it wallowed in a nasty depression. Yep, we want to emulate that ‘success.’
Yes we consume a lot but we also save a lot more than the government credits us. Over 50% of US citizens are stock owners, and we are all told that you have to invest in stocks if you are going to have any hope of building up a big retirement account. Indeed, you are chided if you keep your money in a traditional savings account as you cannot keep up with inflation. What this means is that Americans are being more responsible about their futures and investing in themselves and the US than the government accurately tracks. Shame on you for being responsible and investing in growth versus savings accounts that until recently earned 1%.
But aren’t we a service economy? Yes, but Greenspan gave away our advantage.
Even more significant, we are a service economy. Each month we all breathlessly await the ISM manufacturing report each month as a key indication of our economic health. Services, however, are 80% of our ‘production.’ Can we really expect our goods exports to match what we buy from foreign sources when the vast majority of our ‘production’ is from the service sector? Indeed, our services exports are at a surplus, and they grew by $1.8B to $15.1B as we exported a lot of insurance and financial services. With our manufacturing sector in decline for the past 50 years, we will never, ever approach parity again.
That leaves us confronting what will be a continued high trade gap and current account gap. As long as the US worker is confident in his or her job there is going to be strong consumption of both domestic and foreign goods. That is our history. As long as more US citizens are ‘saving’ via investments in equities and debt instruments as opposed to traditional savings accounts and CD’s and as long as the economy is strong enough to keep job loss worries low, we are going to have this high trade and current account gap.
Maybe that will result in a disaster some day when other countries start gearing their economies away from the US consumer. Indeed that will happen at some point because the Boomers are going to retire and die and we don’t have the same huge demographic group to take their place. Foreign economies will have to look elsewhere to sell their goods in order to keep growing their economies. Of course, we will be consuming less at that time as well due to fewer consumers. That also means we will be saving less for the same reason. So, nothing will change in the bigger picture.
That is why we believe now just as we did back in 1999 that the Fed made the biggest blunder in central bank history when it purposefully slowed the US economy and sent us into recession and a drought of investment in US technology for 3 years. We squandered a huge technological advantage that would have served us well as the Baby Boomers aged: we would have the burgeoning populations in China, India, Brazil, etc. coming to us for technology. Instead we let Japan, South Korea, India in the door and we literally gave away technological secrets to China during the 1990’s. Now we are competing even up on a technological basis and at a distinct disadvantage on a labor cost basis. We are a service economy, but our greatest service was our technological know-how, and we gave that lead away. Not an enviable position, and we are already feeling the effects with jobs losses overseas. Thanks Alan Greenspan. That is your true legacy.
THE MARKET
MARKET SENTIMENT
VIX: 10.68; -0.05
VXN: 13.19; -0.8
VXO: 10.24; -0.1
Put/Call Ratio (CBOE): 0.82; +0.41. Not a very high reading on the ratio given expiration.
Bulls versus Bears:
Bulls: 58.8%. Just like the Energizer Bunny, bulls keep going; higher that is. A strong 2.6% from the 56.2% last week. That puts it well above the 55% level that is considered bearish. Three straight weeks bullishness has exceeded the 55% benchmark considered bearish. The theory behind this reading is that when too many investors are bullish, then most of the money is in the market and it has a hard time sustaining itself. The market is struggling to move higher, more leaders are balking, and the small caps are on a bumpy road. The rally needs to resume this week. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 21.6%. Fell slightly from 21.9% last week, and is being a bit stubborn, refusing to fall to 20% or below that is considered a bearish reading. Still, with bulls spiraling higher, the hold above 20% does not mean a whole lot. 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: -8.15 points (-0.36%) to close at 2252.48
Volume: 2.562B (+40.66%). Now that is a lot of volume. With the NASDAQ 100 rebalancing along with expiration, volume shot to its highest level since early January 2005 when the market started selling off. This was not really distribution in that sense, but it warrants a close watch this week if the index cannot resume the move higher.
Up Volume: 730M (-195M)
Down Volume: 1.792B (+925M)
A/D and Hi/Lo: Decliners led 1.2 to 1. Very modest downside breadth. The selling was primarily focused on NASDAQ 100 given the rebalance of that index. Thus NASDAQ sold off on the movement of the largest cap stocks. That is not suggestive of distribution, just a required reallocation.
Previous Session: Decliners led 1.56 to 1
New Highs: 101 (+15)
New Lows: 56 (+2)
The Chart: (Click to view the chart)
NASDAQ sold off, losing most of its ground in the last hour when it hit a new session low. Volume exploded on the move given quad expiration and the NASDAQ 100 rebalance. NASDAQ lost 0.36% while NASDAQ 100 lost 0.77%. Breadth was very narrow. The large cap tech index sold to the 18 day EMA while NASDAQ held above that level (2246). That keeps NASDAQ in its three week lateral move, setting up for the next breakout. After this relatively flat week NASDAQ is going to have to show us the breakout move. Now that the rebalance is over we will see whether the rally will resume.
SOX (-0.62%) faded through the 10 day EMA (496.37) but it is still holding the breakout that started the month, taking the index out of its 4 month base. SOX and its moves will be key to NASDAQ this week.
SP500/NYSE
Stats: -3.62 points (-0.28%) to close at 1267.32
NYSE Volume: 2.084B (+29.54%). Strongest volume in over a month, coming in well above average. As with NASDAQ, not putting much stock in this volume given the quad expiration.
A/D and Hi/Lo: Decliners led 1.07 to 1. SP600 was leading the downside on the NYSE indices, but breadth was still quite tame. That indicates the selling was not that bad.
Previous Session: Decliners led 1.69 to 1
New Highs: 135 (+42)
New Lows: 95 (0)
The Chart: (Click to view the chart)
SP500 again tested resistance at 1275 intraday but faded back to close at the session low. Strong break higher Tuesday and Wednesday then a slight fade back to end the week, holding the breakout and still easily above the 10 day EMA (1264). The large caps look very good heading into next week, and this is where we are looking for leadership, though NASDAQ and SOX will have to perform as well.
SP600 (-0.57%) struggled yet again, breaking below the 18 day EMA (356.37) and closing at the low. That comes after a hard thump Thursday that sent the small cap index back to the 18 day EMA. This is where it needs to check up the fade and resume the move higher. SP600 resumed its role as a leader to end November, and the market needs it to contribute still.
DJ30
DJ30 took another swipe at 11,000 (10,940 on the high) and then faded back for a modest loss. Its highs for the week were still below the late November highs (10,960) as it struggled and made a lower high this go round. Showed better volume last week on the test higher and is still in the handle to its 10 month double bottom with handle. Likely to test back to the 10 day EMA (10,841) or the 18 day EMA (10,813) before it is ready to take another run at a breakout.
Stats: -6.08 points (-0.06%) to close at 10875.59
Volume: 419M shares Friday versus 297M shares Thursday. Big expiration volume on DJ30 as well.
The Chart: (Click to view the chart)
MONDAY
The economic calendar remains chock full of data this week, and with the Fed saying it is getting to the point it is not so accommodative and needs more data, this wave of data could give the market a push out of the range. Housing starts, new home sales, PPI, final GDP, personal income and spending and Michigan sentiment. If housing continues to erode (and it may show some significant drops the next couple of months), the Fed is going to take notice. It has targeted housing and we are seeing a marked falloff in mortgage activity.
It will need to make a difference. The market has consolidated well after the strong November move, and it is set up to continue higher. Indeed, as noted this past week, it has set up well but has not made the move and is starting to stumble. It is struggling to continue the move, showing some stock breakdowns and a lack of new breakouts and it is also simply running out of time for a further year end rally.
We don’t want to obsess about a run to the end of the year. Still, the market has performed well and after a nice run and equally nice consolidation you want to see it finish it off. Perhaps that means a run into the start of 2006 as opposed to a repeat of the 2005 tumble. That may occur, but the latter parts of the current run certainly had some attributes of year end performance chasing by the big money funds. That is likely not to continue into the new year but we could see a resumption this week now that expiration is over and the NASDAQ 100 rebalance is complete.
That opens the door to a nicely set up market to continue higher, a market where the large cap SP500 looks ready to try its hand at leading. Again, that leaves just a couple of weeks before the year end for the big money to buy up some more stocks and thus keep the rally running. It will have to show signs of life early this week now that expiration is over for us to get really excited about a serious run to the year end, a run that we can use to make some money.
With that in mind we are going to continue looking at leadership stocks that have used the lateral move to set up for a year end sprint as well. At the same time we are continuing to monitor current positions with a fairly tight leash. The market is volatile right now and more stocks are trading all over the map. We are seeing more stocks sell off just to rebound and vice versa. Again, now that expiration week is over and NASDAQ 100 is rebalanced, the remaining ‘Santa Clause’ rally needs to resume, putting that good consolidation to work. If the buyers abandon the move now it does not bode well for a continuing move to start 2006.
Support and Resistance
NASDAQ: Closed at 2252.48
Resistance:
The 10 day EMA at 2256
2264 from the June 2001 peak
2273 is the January 2001 closing low
2288 from December 2000 low.
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2251 is the January 2001 low
The 18 day EMA at 2246
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.
The 50 day EMA at 2202
2178 is the January closing high
S&P 500: Closed at 1270.94
Resistance:
The recent highs at 1275
1267 to 1273 is the May and May 2001 peaks (1315 intraday)
1324 to 1329 from the October 2000 lows.
Support:
1264 from the December 2000 lows is giving way.
The 10 day EMA at 1264.55
The 18 day EMA at 1259
1250 may prove to be some psychological support.
The August high at 1246
The September high at 1243
The 50 day EMA at 1240
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
Dow: Closed at 10,875.59
Resistance:
10,952 – 10,965 from Q4 2000 and late November 2005
10,985 is the March high
11,176 – 11,186 from April 2000
Support:
10,868 is the December 2004 high
The 10 day EMA at 10,841
The 18 day EMA at 10,813
10,754 is the February high
10,720 is the high in the recent lateral move
The 50 day EMA at 10,686
The June highs at 10,646 to 10,656
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
December 20
- Housing Starts, November (08:30): 2010K expected and 2014K prior
- Building Permits, November (08:30): 2079K expected and 2103K prior
- PPI, November (08:30): -0.4% expected and 0.7% prior
- Core PPI, November (08:30): 0.2% expected and -0.3% prior
December 21
- GDP-Final, Q3 (08:30): 4.3% expected and 4.3% prior
- Chain Deflator-Final, Q3 (08:30): 3.0% expected and 3.0% prior
- Crude Inventories, 12/16 (10:30): 892K prior
December 22
- Initial Jobless Claims, 12/17 (08:30): 329K prior
- Personal Income, November (08:30): 0.3% expected and 0.4% prior
- Personal Spending, November (08:30): 0.4% expected and 0.2% prior
- Leading Economic Indicators, November (10:00): 0.4% expected and 0.9% prior
December 23
- Durable Goods Orders, November (08:30): 1.0% expected and 3.4% prior
- Michigan Sentiment-Rev., December (09:45): 89.0 expected and 88.7 prior
- New Home Sales, November (10:00): 1310K expected and 1424K prior |
