InvestmentHouse Weekend Update:
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- Jobs report gives market an excuse to bounce; this time relief move sticks.
- Non-farm jobs continue to grow as more job seekers re-enter the market.
- Jobs report doubles chance of third rate hike in June even as other indicators continue to soften.
- Defensive stocks dominating the rebound, but there are still growth leaders holding well.
- Wall of worry versus macro economic themes pushing market around near the post-2002 highs.
Stock rebound manages to hold into the close.
The jobs report was stronger, and in the current Fed-induced anti economic strength mindset you would expect that news to further weaken stocks. After six straight down sessions on NASDAQ and five out of six on SP500, however, the market was oversold and needed to come up for air at some point. Thus even though the strong jobs data indicates further Fed action, indeed starting to once more build in an additional 25 BP to 5.25% on Friday, the market latched onto it and rebounded. Apparently good economic news can be good news if you have been beat up enough.
Stocks rallied early, held up through a mid-afternoon, pre-weekend selling attempt, and bounced into the close. Breadth was strong as the small and mid-cap indices worked with the large caps. Volume was up on NYSE but lower on NASDAQ. The up volume was not that solid either; NYSE trade came in well below average even with the rise in trade and NASDAQ volume fell below average for only the second time in 9 sessions. Stocks were moving but they lacked punch, not what you want to see on an up session, particularly after sellers used stocks as punching bags the prior week.
The rebound had a defensive flavor to it, literally, as defense stocks continued to provide some leadership. Health related stocks and consumer staples gained as well, adding more to the defensive nature. The move was broader than that, however, and most sectors enjoyed a rebound. With the volume and defensive flavor, it definitely had the look of a relief bounce.
Technically there was some healing. NASDAQ managed to hold its 2006 range, bouncing off an undercut of 2250, roughly the bottom of its three month lateral move. Always good to see support at the bottom of a range hold. SP500 held the 50 day EMA, trying to put in a higher low and turn a failing double bottom with handle (that was shaping into a double top) into an ascending triangle. Given the several mutations on SP500 you can understand why we always say a chart pattern is just a pretty picture until it makes the move that seals the deal. Though volume was mediocre, SP500 shows some better price/volume action the last half of the week.
SP500 remains the best behaved index, bouncing off the 50 day EMA and its up trendline after coming back down for a test when the upper channel line reined it in. It mid-cap compadre, the SP400, is not as well-mannered, falling through its 50 day EMA last week and trading just back to that level Friday. SOX remains the black sheep. It crashed through the 50 day EMA to start the week, sold lower, and made no attempt to rebound Friday. All it could manage was a hold at 500, right in the middle of the range of December peaks. It is always kind of lame to play up a hold of support when the rest of the market bounced. You have to be pretty weak when all you can do is not sell more when the rest of the market is bouncing. Not quite the picture of health. That said, it is due for a bounce as well, and as the market bounces some more early this week it could finally get some legs underneath it.
All in all we still have to read this as a relief move thus far. Breadth was solid but volume was weak, market leadership was defensive, and we saw more leading growth stocks break down last week and continue to sell Friday (e.g., BRCM, MRVL). The market can still bounce more in relief; there was quite a lot of selling last week as the indices finished lower despite the Friday gains. SP600 and SP500 held support and bounced, showing better action toward the weekend. Thus there is some life in the market, but it is going to have to spread out if this bounce is going to turn into something that can lead to a new break higher. The outside influences (e.g. the Fed, energy), however, have not changed, and when the relief bounce relieves the oversold condition the market will be challenged to move further.
THE ECONOMY
Jobs report continues to strengthen, luring more into the workplace.
Non-farm payrolls advanced 243K versus the 210K expected as the jobs market showed strength across the board. The December/January period was written lower by 18K, but the average over the past three months is 186K, more than enough than the 150K or so needed to just keep even. At the same time the unemployment rate rose to 4.8% from 4.7%. How can it do that? Because the workforce climbed 335K in February as more workers were lured into the market by all of the headlines over jobs the past couple of months. Remember, up until Q4 of 2005 the economy and the jobs market in particular was still considered puny and weak. Something got into the water apparently, because all of the sudden the economy is strong, the jobs market solid, and everyone is worried about overheating.
That, of course, plays into the Fed’s hands. It is able to control the market best, or at least get away with its overly tight policies, when everyone buys off on its version of the facts. What are these facts? That jobs, wages, and consumption cause inflation. In other words, when people finally start to realize some prosperity from a recovery the Fed assumes inflation is coming. Jobs are getting a bit more plentiful now and wages are finally starting to rise, showing a 3.5% annual gain in February, the best year over year rise since September 2001. While most would call that prosperity, at this point in a Fed rate hiking campaign it is called inflation pressure.
Market building in even more rate hikes after the jobs report.
The Fed sounded good heading into the new year, having just about wrapped things up. Housing is slowing, jobs and wages are growing modestly, businesses are still investing and thus ensuring supply will remain strong. Importantly, the real measures of inflation, the core CPI and PCE indicate no inflation. Very similar to 2000 when there was no inflation and the economy was starting to soften despite being labeled ‘white hot’ every day in every financial rag.
Of course that did not stop the Fed, and the market knows that. That is why Friday the odds of a third 25BP hike in June (after 25 in both March and May) doubled from 10% to 20%. In the big picture that is still low, and this far out it is not as accurate because so many things can change. It does, however, show the mindset, i.e. that the Fed will continue hiking rates until it slows things down.
That is a far cry from the good game the Fed was talking in the fall and on into Q4. There was a lot of talk about being almost done and the Fed even put into its minutes that it was well aware of the ‘one hike too far’ syndrome. Well, we all know we should not eat that last scoop of ice cream or make that last ski run when we are tired or stay out in the sun just another 15 minutes, but we do. The Fed, sadly, acts no differently than just regular old humans. Thus it has a well documented history of raising rates too far. You don’t see the extra pounds from the ice cream or the nasty sunburn until after the fact, and that is just what happens with rate hikes. If you wait to take remedial action once you see the problem it is too late. Funny. That is what the Fed says about inflation: if you wait until you see it, you are too late. For some reason, however, it cannot see the other side of the equation: if you keep hiking until you see significant slowdown, you are too late as well and we all pay the price for another significant economic slowdown or recession.
THE MARKET
MARKET SENTIMENT
VIX: 11.85; -0.83
VXN: 17.62; -0.17
VXO: 11.66; -0.61
Put/Call Ratio (CBOE): 0.87; -0.08. The week showed a close over 1.0 and two closes of 0.90 or better. That is not enough extreme readings to indicate a rebound, at least from this secondary indicator.
Bulls versus Bears:
Bulls and bears rose again last week and for the second straight week have surpassed the levels in May and October 2005 that signaled bottoms in the market ahead of rebounds. That remains a positive for the market, but even high levels while the market was at the breakout point recently was not enough to push the market higher. The closer bulls and bears come to each other the better potential for a bottom. Thus far it is not making the difference. We have to keep this in its place: it is a secondary indicator. It tells us to watch for signs of a turn. It does not declare a turn on its own.
Bulls: 42.7%. Edging higher from 42.6% the prior week. Bullishness had been diving hard, dropping from 45.3% and 48.9% the week before. Quite a drop from 60.4% hit at the start of the year. It has undercut the prior two lows that helped kick off their own rallies.
Bears: 31.3%. Another solid push higher from 30.8%. Bear growth continues to slow, down from prior weekly climbs from 25.5% to 27.7% to 29.5%. Already has surpassed its readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +12.32 points (+0.55%) to close at 2262.04
Volume: 1.779B (-11.32%). NASDAQ finished the week on lower trade with a gain. That is not bad price/volume action, it is simply not good action that shows accumulation of stocks. The week started poorly with a distribution session then tried a higher volume reversal on Wednesday. This is middle of the road at best, but it also comes after a high volume intraday reversal two Fridays back when NASDAQ tried to make the breakout but turned around intraday. It was unable to make anything positive of that, but at least it showed only one clear distribution session in response. That leaves it basically neutral with respect to accumulation as it enters this week attempting a rebound off the bottom of its 2006 range.
Up Volume: 1.127B (+432M)
Down Volume: 619M (-659M)
A/D and Hi/Lo: Advancers led 1.9 to 1. Decent breadth but not blowout.
Semiconductors are acting as a drag.
Previous Session: Decliners led 1.47 to 1
New Highs: 100 (+13)
New Lows: 55 (+11)
The Chart: (Click to view the chart)
NASDAQ opened slightly higher Friday, but it was selling again right off the bat, undercutting 2250 and reaching to the February closing lows (2239). It found its footing at that point, however, and rebounded to post a solid if unspectacular gain. It tested the 50 day EMA (2269.45) on the high, but it never seriously threatened that level. Volume was running lower, and the positive close was about all it could do on the session. Given the week, we have to be happy with that. The 2250 level is a rough line of demarcation for NASDAQ as it represents the December highs and the February lows. A break below this level and it heads toward 2219, the August 2005 high and the breakout point from its longer 2 year ascending triangle. It is important for the index to hold that breakout. In the bigger picture, if that breakout fails that indicates serious slowing ahead. For now NASDAQ is holding its new higher range for 2006, and we take that as a positive though we also know the move has been weakening with leadership techs and chips breaking their trends.
SOX (-0.24%) gave up a gain on the close, but it also managed to hold some support at 500, roughly the mid-point of the December 2005 highs. Hard to call it a positive session given it could not rally with the rest of the market and given it has now posted 7 consecutive losses. Definitely oversold, and this hold at support suggests it will try a bounce if the rest of the market can continue the upside move this week. Big names, however, are still falling in the semiconductors, e.g., BRCM, MRVL, TXN.
SP500/NYSE
Stats: +9.35 points (+0.73%) to close at 1281.58
NYSE Volume: 1.602B (+2.86%). As noted, price/volume action improved on NYSE after the Monday distribution. The action was solid, then turned weaker as NASDAQ improved, and has now turned to the better as NASDAQ again wanes. Wednesday and Friday it showed those upside gains on rising volume, and that always suggests buying. It was enough to hold SP500 at the 50 day EMA for now, but it will have to continue improving to drive it higher toward the breakout. As of yet there is not the conviction necessary to drive it higher given all of the external negative influences.
A/D and Hi/Lo: Advancers led 2.44 to 1. Very solid advance as large and small caps rebounded. Given SP500 and SP600 held key support, the advance was significant.
Previous Session: Decliners led 1.22 to 1
New Highs: 123 (+34)
New Lows: 45 (+4)
The Chart: (Click to view the chart)
SP500 started the session below the 50 day EMA (1274), but spent most of the session climbing higher, recovering the 10 and 18 day EMA (1281) after failing to take those levels out on the Thursday rebound attempt. SP500 traded around the December highs (1275) all week and then made a more definitive move higher after holding that key level. The price/volume action improved following the Monday distribution session; indeed, the upside volume that followed was stronger, at least on Wednesday when SP500 made its most dramatic move of the week, i.e. the intraday reversal. If it can make this move stick it will have put in a higher low and set up an ascending triangle after threatening with that double top. Still has to complete the move, but looking much better. The leadership is still in flux, however. Big defense (military) is doing well (in a war, if the economy goes lower at least the defense companies will get orders) as are healthcare and drug stocks, also defensive issues (everyone needs healthcare), and consumer staples (you have to eat, keep clean, etc.). Those are helping drive the action along with, strangely, financials. Those are contradictory but thus far they appear to be working together.
SP600 (+1.22%) was the clear market leader as the small caps held the up trendline and the 50 day EMA (370.61) and bounced on that rising NYSE volume. They were primed to come back after bumping into the upper channel line of the uptrend and running out of steam. Primed to lead higher again, but whether the rest of the market will follow on to a breakout is a big if right now. Almost textbook perfect technical action right now within its trend.
DJ30
The blue chips were leaders as well though it was more of a cessation in the selling of the ‘growth’ stocks in the index than a surge of strength. The strongest stocks in the index are defensive, but if you are a Dow fan you cannot argue with the move: Held the 50 day EMA (10,932) mid-week, made a higher low, and is rallying toward the recent highs (11,159). No volume, however, but with NYSE showing stronger trade it is livable.
Stats: +104.06 points (+0.95%) to close at 11076.34
Volume: 257M shares Friday versus 266M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
The economic data continues to roll in after the jobs report with retail sales, regional manufacturing data, Fed Beige Book, CPI, housing starts, industrial production and Michigan sentiment. Good. We were worried what with the Fed, rising interest rates, oil, Iran, Iraq, port security, and worries over removal of tax incentives that the market would not have anything to push it.
The issue for us this week is just how much ‘umph’ the Friday move has in it. Wednesday the market reversed but Thursday it could not carry through. Now the market has shown a more substantive move. Will the buyers step in and further the rally after the shorts started to cover following more than a week of selling?
There is certainly a wall of worry to climb out there with so many potentially adverse issues facing the market, and stocks tend to climb those walls. Great. Indeed, SP500 and SP600 made strides along that line Friday, and NASDAQ even held the bottom of its range and bounced. The market is certainly trying to hold the line and move back up; SP500 and SP600 with their higher lows may even try another breakout. The news is not great, but if this move continues it shows some underlying strength that cannot be ignored.
We will see if it continues, and if it can show strength as it does. What concerns us is the themes that are running through the market, themes we have seen before at turning points. We discussed them last week as the market showed another bought of weakness. Indeed, this back and forth action from hot to cold and the quickly shifting price/volume action from strength to weakness between NASDAQ and NYSE is part of that. The economy, after lingering perceptions it was lagging well behind other recoveries, is suddenly seen as too strong. This even as leading indicators show softening. Not reversals threatening a crash, but the same weakness we saw in 2000. That was survivable, but the Fed got too aggressive at the wrong time. The Fed was ready to wind it up and go home, but now the market is pricing in even more hikes. Growth sectors are getting cut low while defensive sectors take the lead. This is a very important macro overlay to the action we are seeing.
You can always tell there is something up when you are winning consistently and then hit a series of losers. That is the time to back off and see where how the market resolves the issues. We have been paring positions the past two weeks while trying to focus in on those starting to show new leadership as well as those leaders that have taken a pause, are still in great shape, and then show us a continued move.
We are going to continue looking at potentially emerging leadership as well as leaders taking a breather and are now ready to move higher again. We will enter cautiously, however, moving in piecemeal, not trying to take the entire position at once. This is typically the way we work into positions anyway, e.g. buying more on the test of a breakout or a pullback to near support. That way the stock continually proves to us that it is worthy of our hard-earned money.
The current environment makes it even tougher, however, because the market’s action shows it doesn’t know which way it wants to go. That forces us to be quicker on the kill button and thus susceptible to seeing a position rebound as the market heaves back and forth, trying to decide where it wants to go. Some call it getting whipsawed. We just say it sucks. Thus we are trimming positions, exercising caution as the primary concern. In this kind of market you can get hurt easier than you can get rich, so caution is the key.
We are still going to look at many possible plays; in this market you take a look at what is looking good, watch them all, and see what sticks. You can make up your mind to ride out the volatility, letting positions dip low, but the problem with that right now is the common themes with prior market peaks and the potential for a more serious meltdown. A modest undercut becomes a real issue if the Friday rebound was just a head fake or a one day wonder and the indices head lower. Indeed, one day wonders are the hallmark of a very weak market, i.e. one where one upside day will be enough after a week of selling to set the stage for another week of selling.
We are not there yet and Friday showed some strength, particularly on SP500 and SP600, a rather odd mix for the end of an economic expansion. Indeed, those two improved their internal action after the Monday slow start to the week. That means we are going to look at those emerging leadership groups (the ones that move; not the ones where a dollar gain is a good month’s work) as well as those leaders that continue to show the strength we like to see. Of course, we are also going to have some downside plays; there are simply too many stocks breaking down to ignore this side of the action.
Support and Resistance
NASDAQ: Closed at 2262.04
Resistance:
The 50 day EMA at 2270
2273 is December 2005 closing high.
The 10 day EMA at 2275
2278 is December 2005 intraday high.
The 18 day EMA at 2278
2288 from December 2000 low.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
A minor peak at 2249 is still holding.
2218 from August 2005 peak
S&P 500: Closed at 1281.58
Resistance:
The 18 day EMA at 1281
The 10 day EMA at 1281
The late January peak at 1285
The January high at 1295
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 50 day EMA at 1274
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
1245 is the August 2005 peak
1241 is the September 2005 peak
Dow: Closed at 11,076.34
Resistance:
11,159 is the February high.
11,176 – 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11044 is the January high.
The 10 day EMA at 11,018
The 18 day EMA at 11,007
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
The 50 day EMA at 10,926
10,890 is the December 2005 closing high.
10,868 is the December 2004 high
10,705 from the July/August 2005 peaks to 10,682 that is the September 2005 high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
March 14
- Retail sales, February (8:30): -0.7% expected, 2.3% prior
- Retail sakes, ex-autos (8:30): -0.3% expected, 2.2% prior
- Current account, Q4 (8:30): -$217.9B expected, -$195B prior
- Business inventories, January (10:00): 0.3% expected, 0.7% prior.
March 15
- New York PMI, March (8:30): 18.0 expected, 20.3 prior
- Net foreign purchases, January (9:00): $56.61B prior
- Crude oil inventories (10:30): 6.76M prior
- Fed Beige Book (2:00)
March 16
- Building permits, February (8:30): 2.128M expected, 2.216M prior
- Housing starts, February (8:30): 2.03M expected, 2.276M prior
- CPI, February (8:30): 0.1% expected, 0.7% prior
- Core CPI (8:30): 0.2% expected, 0.2% prior.
- Initial jobless claims (8:30): 303k prior
- Philly Fed, March (12:00): 12.6 expected, 15.4 prior
March 17
- Industrial production, February (9:15): 0.7% expected, -0.2% prior
- Capacity utilization, February (9:15): 81.3% expected, 80.9% prior
- Michigan sentiment, preliminary March: 89.5 expected, 86.7 prior. |
