InvestmentHouse Weekend Update:
investmenthouse.com
- Jobs report doesn’t phase stocks, but rising rates gut a Friday rally attempt.
- Fear of flying: why we are conditioned to fear prosperity.
- A little bit of history repeating, but maybe not.
- Money supply and interest rate advance remain positives.
- Friday price fade was strong but leadership still positioned to move after this pullback.
Stocks shake off jobs report but bond market sell-off bleeds over into equities.
As expected, the jobs report was stronger than expected, but futures rallied after wages showed little headway, coming in lower than forecast. Stocks opened higher out of the gate with NASDAQ, SP500 and SP600 pushing to new post-2002 highs. We were concerned an early jump might flare out, but also felt that the recent NASDAQ break higher and SOX’ rebound would help support an early move. That did not happen.
Stocks were up early, but bonds started to fade quickly. Yields pushed higher and higher with the 10 year closing at 4.98% and the 2 year at 4.90%. The 30 year has already crossed the 5% threshold, closing at Friday at 5.05%. As the 10 year definitively broke through 4.80%, stocks again started to suffer.
After that quick start the slide began. Within the first hour SP500 had slipped back below 1310, its March resistance point, as it and the other indices were on route to a steeper decline. Two and one-half hours into the session and stocks basically hit their bottom for the session, SP500 struggling to hold its 18 day EMA for the next 4 hours. After that long consolidation attempt by all of the indices, however, stocks found no traction and a modest bounce attempt faded into the close. That left the indices basically closing on their session lows, never a good indication as it shows there were simply no buyers willing to risk an over the weekend commitment with new positions.
Volume was tame, coming in lower on both NASDAQ and SP500. Sellers were definitely in control Friday, but they did not overrun the market. Indeed, volume was lower than the recent upside sessions, and thus despite the point losses it was more a lack of buyers willing to commit than sellers dumping shares. Thus Friday did not represent some seismic shift in the recent action. Sure the upside move on SP500 was on lower volume than we wanted, but the downside volume Friday was even lower than that. Again, it was a lack of buyers as opposed to a new onslaught from sellers.
In addition, NASDAQ, SOX and SP500 held their near support after their upside moves. Indeed, NASDAQ held its recent breakout over the January high, easing back on lower, below average volume. That was the action many leading stocks showed, i.e. fading back to near support.
You can moan about the Friday action as indeed many on the financial stations did, and with the low volume move higher on SP500 the past 4 weeks you do have to view the market action with caution. Still, the volume indicates no real selling and the holds at near support suggest the same. Holding the breakouts on low volume also sets up new buy points when the market holds and starts to rebound. Indeed, ahead of earnings announcements a pullback is a good thing, taking the fluff out of runs and setting stocks for further upside. There is always risk associated with a big point drop and earnings just around the corner, but with continued strong leadership and the overall light pullback volume, the big investors have not changed their mode from overall accumulation. That makes low volume pullbacks to support make for entry points ahead.
THE ECONOMY
Conditioned to fear prosperity . . . and jobs.
Over the Greenspan years (and indeed it can be tracked back to the 1929 Fed) the US citizenry has been lectured by its parental overseers (the Fed, the federal government) and seconded by certain segments of academia that it is basically a group of irresponsible spendthrift children. Who can forget Greenspan’s repeated mantra of the late 1990’s, i.e. the ‘runaway consumer.’ Because of this supposed uncontrollable need to satisfy our every consumption whim we are told that the Fed has to watch every other area of the economy, and if it gets ‘too hot’ according to the Fed then action is necessary.
Thus when the economy, after a so-called jobless recovery, finally starts producing job growth 3 years into a recovery, we are told and almost blindly accept that lagging indicator as an indication the economy is too strong and must be reined in. Friday added additional burden on the consumer as March non-farm jobs came in at 211K (190K expected and 225K prior, down from 243K) and the unemployment rate fell to 4.7% from 4.8% (4.8% expected). Wages rose just 0.2% versus the 0.3% expected and 0.4% upwardly revised February reading. That was supposedly the savior of the report as it supposedly suggests tame inflation.
Red herring. Jobs are not an inflation indicator. Jobs are good. We are supposedly at or near full employment. That is not an inflation problem, that is an employment problem. The theory is workers become scarce and employers have to pay more to get the desired personnel. Those higher wages are spent, driving up prices.
That is hogwash. Rising wages don’t equate with rising inflation anymore than a strong housing market. As we have said before, it is the overall level of liquidity that determines whether inflation occurs. If there is so much excess money in the system that money is spent regardless of underlying supply then prices rise. Thus, rising wages in and of themselves is not inflation. Employment and wages can play a role, but it is just one very small part of a huge overall monetary equation that has to have many other factors fall into place to contribute to inflation. In short, wages in and of themselves cannot cause inflation. High employment in and of itself cannot cause inflation.
Despite economic reality the Fed has done a good job of brainwashing the media regarding inflation. Greenspan was a chief promoter of obfuscation regarding economic reality. He openly admitted he didn’t want to be clear. He even commented that surprise was sometimes good for the financial markets. Very cloak and dagger. That way he had free rein to make rate moves without much question from other authorities. Too many blindly accepted Greenspan’s ‘prosperity indicators’ of inflation. Then when the Fed wrecked the economy in 2000 they were so fully invested in the Greenspan approach that very few stood up and said that Greenspan’s fear of prosperity approach was simply wrong both in theory and in fact as shown by the crash.
Ready to make the same mistakes: tightening into a mature expansion and a gasoline-induced slowdown even as the Fed’s work is done.
This is important because right now the environment regarding the economy is very similar to 2000. There is an aging expansion that is still doing fine on its own but that is being pressured by the Fed even as the economy shows some signs of age.
ECRI is the best leading indicator basket when it comes to predicting economic trends. ECRI’s FIG (Future Inflation Gauge) shows that inflation peaked in October 2005. It is down four of the past five months and is at an 8 month low. We wrote in January about how ECRI’s readings were telling us inflation was peaking and that the next few months would show the answer more clearly. It is doing just that, bearing out the early indications. Moreover, ECRI’s economic measures show a global industrial slowdown is taking root even as current commodity prices jump higher. That seems incongruous to some: prices rise because demand rises. If prices are still going up then surely demand is still expanding. What often happens, however, is that prices outpace economic activity, reaching levels that cause a drop off in economic activity. That is what ECRI is reading.
If that does not sound right to you, consider gasoline prices last fall just after the Gulf storms. When price hit $3/gallon there was a very real and noticeable drop in demand for gasoline and in consumer buying. Despite all of the talk today about a recovering Japan and Europe, these soaring commodities prices can quickly undermine them. How many times did Japan start to emerge from its depression just to get knocked back by rate hikes or a spike in oil? Prices do reach a point of inelasticity with respect to demand.
Unfortunately, the common belief fostered by the Fed and accepted by too many is that good job creation and strong economic activity necessarily leads to inflation. We even heard some financial anchors Friday talking about ‘wage inflation’ based on the recent stronger job gains. This kind of sloppy, bandwagon reporting makes it all too easy for disasters such as 2000 to occur again.
What the truly leading data shows us is that the Fed’s work is done. It is time to be careful and nurture an aging expansion and some new life around the globe and that means looking down the road to what will happen as opposed to what has happened. At the very least the Fed should pause ahead of what will clearly be $3/gallon gasoline this summer, see how the resulting demand destruction impacts the economy, and then reconvene to decide if any more work is required. Good, forward-looking common sense. That is precisely why the Fed likely won’t do that.
The Fed, the federal government, and the Fed ring-kissing economists, duped the general public in the late 1990’s and 2000 into believing we were too prosperous. As a group we let them destroy much of our future, and now, just when we are starting to rebuild it they are ready to repeat the same mistakes. Bernanke may surprise us, but that is betting against the odds. Our representatives need to know what we think now. We have to demand more accountability from public servants that have so much control over our lives. Call your congressmen and senators and just let them know you are watching, what you expect, and that you care. That goes a long way, further than you would think.
Some positives linger: bond yields up, money supply strong.
While the Fed should at least close the books for a few months to see how the economy and indeed the world economies respond to rising commodities prices, there are some continued positives.
Bond yields continue to rise on their own, finally responding to the Fed’s pushing over the past two years. Is it suddenly a recognition of the Fed’s actions or is there something else at work pushing rates? That is what the market is pondering, particularly now the 10 year has moved through 4.8%. It is also another reason, however, that the Fed’s work is done or should go on hold for now.
In the late 1990’s and early 2000 the Fed was not only raising interest rates, but in early 2000 it started aggressively lowering the money supply pool. In fact, it drained it dry. It recalled all of its money it flooded the system with ahead of Y2K and more. Venture capital dried up, small businesses could not get loans; basically the worst nightmare possible for an economy. We all know the results.
Right now the Fed has not crimped money supply here in the US, and that is one of the complaints from some pretty sage economy watchers such as Steve Forbes. Rates are higher, but there is still plenty of money available. Higher rates crimp demand, but if excess money is still present it will be put to use. That is the opposite of the post-2000 years: the Fed lowered rates to start 2001 but it did not appreciably increase money supply nor did it take banks off of restricted status. Thus even though rates were lower you couldn’t get money even if you wanted it.
M2 money supply has steadily increased since early 2004 from $6.2T to $6.8T thus far this year. M3, the broadest measure of money, is up even more, rising from 9.0T to 10.5T over the same period. Thus even as the Fed raises rates it is not taking money out of the system. That means the money is still there if you want to pay for it. That allows businesses to tap money if they need it. The key becomes a balancing act of the rates: are they at the right level to sustain an expansion but not flood the economy with too much money and spark inflation. With the obstacles heading the economy’s way as noted, time to stop the hikes and see how it fares.
THE MARKET
MARKET SENTIMENT
VIX: 12.26; +0.81. Jumped Friday, but in the big picture, still at the low end of the range for the past year. We are not concerned about volatility unless it starts to spike higher. After these long periods at low levels, when volatility climbs sharply that is a sign a rally is over. That is the opposite of the conventional wisdom you hear on the tube, but after long periods of low volatility in a rally that is how things start to reverse.
VXN: 15.88; +0.25
VXO: 12.01; +0.97
Put/Call Ratio (CBOE): 0.91; +0.13. Good climb in put activity on the first significant price dump in 2 months. That still shows a bit of fear and also plenty of downside speculation that the rally cannot last. Good for a contrarian indicator.
Bulls versus Bears:
Bulls: 49.5%. Sharp jump from 46.7% after pausing for a week. Bulls have picked up steam the past three weeks as the talk about a surging economy and new index highs swells the ranks. Still below the 55% considered bearish, but well up from the 42.3% low that undercut the two prior lows in May and October. It helped due the trick in sparking this run.
Bears: 27.8%. Down from 28.3% last week and 33% on the high this cycle. Still well above the 20% level below which is considered bearish for the market. It started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -22.15 points (-0.94%) to close at 2339.02
Volume: 2.042B (-7.43%). Solid trade but below average trade as NASDAQ fell back. Volume rallied on up sessions coming into the Friday selling. As discussed above, we are not too worried about that action. NASDAQ has shown good accumulation into that move and a strong volume breakout two weeks back. Sellers were in control for the day but not for the move.
Up Volume: 449M (-961M)
Down Volume: 1.493B (+729M)
A/D and Hi/Lo: Decliners led 2.18 to 1. The move higher the past week was led by the large cap techs and was narrow. That was a weakness for the NASDAQ. Friday the selling was generalized over the index but again, volume was much lower.
Previous Session: Decliners led 1.06 to 1
New Highs: 178 (-30)
New Lows: 44 (+6)
The Chart: (Click to view the chart)
NASDAQ gapped higher and ran to a new post-2002 high (2375.45) but could not hold the move. Indeed, it hit its high in the first 15 minutes before turning over. It spent the last 4.5 hours of the session hugging the 10 day EMA (2338). That is its first level of near term support and also keeps it holding the breakout over the January high (2333) it made two Wednesdays back. While the point loss was more than you like to see in one session, there was no distribution. We expect NASDAQ to hold near this level, perhaps testing the 18 day EMA (2326) on the low before resuming its move.
SOX (-1.84%) gave back ground as well, and though it was the downside leader percentage-wise, it was relatively not as big a loser in the past given SP500 lost 1% and SP600 lost 1.2%. In any event, despite the Friday loss, SOX had a good week with a solid advance starting with Monday. Wednesday and Thursday were particularly strong as SOX cleared the 50 day EMA (512.34). It came back to tap that level on the Friday low before a modest rebound. We wanted it to clear 525 first and then test, but it is doing that now, setting up the break through 525. We don’t have a problem with that, and indeed we like this test as it gives us some good entry points on chip plays not to mention a great set up for a nice upside option play on SOX itself.
SP500/NYSE
Stats: -13.54 points (-1.03%) to close at 1295.5
NYSE Volume: 1.527B (-2.91%). Volume was lower and remained below average as SP500 broke the 18 day EMA but SP600 held support. Not a major breakdown, but SP500 was subject to potential upset with that lower volume rise. Still, the lower volume indicates the sellers were not overwhelming the index.
A/D and Hi/Lo: Decliners led 4.17 to 1. This was ugly as the NYSE indices were sold across the board, large cap to small cap. If this had occurred after a slide lower you would conclude it had hit an extreme and indicated a rebound.
Previous Session: Decliners led 1.33 to 1
New Highs: 163 (-52)
New Lows: 108 (+40)
The Chart: (Click to view the chart)
SP500 was whacked Friday, falling through the 18 day EMA (1299.57) and just managing to hold onto its breakout above the January and February highs, tapping at the October/March up trendline on the low. Significant point drop somewhat mitigated by the lower volume. Given the downside momentum it may not hold the January high absolutely and may undercut it intraday and test the 50 day EMA (1289) before trying to rebound. Even that keeps SP500 in its recent February/March uptrend. In short, the Friday point drop was not great but it was far from a disaster.
The small cap SP600 (-1.21%) sold as well but it tapped its 18 day EMA (389.53) on the low and rebounded modestly. That keeps it roughly at the upper channel line as it makes its test of the solid March upside move. If it holds here that would be a sign of real strength.
DJ30
DJ30 struggled with SP500, fading back to the late March low at 11,100 and roughly at the February high (11,159). That keeps the blue chips in their October/January uptrend and easily above the 50 day EMA (11,082). It also made a lower high on the move, not the greatest action but also not a death knell. Looking for a test of the 50 day this week and possibly the trendline and from there we see what kind of guts it has. Volume was up Friday but marginally and still well below average. Like the odds for a hold and a bounce barring some really crappy earnings and guidance.
Stats: -96.46 points (-0.86%) to close at 11120.04
Volume: 256M shares Friday versus 240M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
Earnings season officially kicks off this week and that will be the focus but not the only data. Despite the all hallowed jobs report last Friday there is plenty of important data such as retail sales (got a preview this week and they were not good), Michigan sentiment, and industrial production hit the wire. Likely overlooked but the most important batch of news for us are the business inventories released on Thursday. Last week saw wholesale inventories rise 0.8% versus the 0.5% expected and 0.2% in January. Overall sales continue to outpace inventory growth 9% year/year versus 6% year/year. Still we are looking for signs that is reversing as the economy slows some. Thus the inventory data over the next few months becomes more important particularly with the ECRI readings.
Even with the economic data, earnings along with the usual suspects of earnings, energy, interest rates, and Fed-speak will be the most closely watched events of the week. Friday gave the market a good jolt just ahead of earnings, taking out some of the recent gains. It is always good to go into earnings a bit lower.
The declines combined with the lower overall volume and the pullback in leaders will give us some opportunities as earnings start. Energy was a surprise Friday; the rest of the market dropped, but energy did not get any money, instead falling with everything else. Many of those leaders held near support as well, however, and we will be looking at them as well. These low volume pullbacks to near support are always something we like; we view it as opportunity to enter some leaders. The key is what kind of pullback it is. The current one was sharp Friday and raised the apprehension level but it did not do much technical damage. Again, to us that spells opportunity. The market still has issues with gasoline rising in the summer, but we are going to keep watching the accumulation versus distribution to see if the big money is still buying. If that is the case, these pullbacks are a positive.
Support and Resistance
NASDAQ: Closed at 2339.02
Resistance:
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2338
The January high at 2333
2328 from the May 2001 peak
The 18 day EMA at 2326
The recent high at 2325
The 50 day EMA at 2299
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
S&P 500: Closed at 1295.50
Resistance:
The 18 day EMA at 1300
The 10 day EMA at 1302
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the
February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
1297.57 is the recent February high.
The October/March up trendline and the January high at 1295
The 50 day EMA at 1289
The late January peak at 1285
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
Dow: Closed at 11,120.04
Resistance:
11,159 is the February high.
The 18 day EMA at 11,176
The recent March highs at 11,329 to 11,335
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11,097 is the last peak from the February top.
The 50 day EMA at 11,082
11,044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
April 12
- Trade Balance, February (8:30): -$68.0B expected, -$68.5B prior
- Crude oil inventory (10:30): 2.11M prior
- Treasury Budget, March (2:00): -$71.2B expected, -$71.21B prior
April 13
- Business inventories, February (8:30): 0.3% expected, 0.4% prior.
- Export prices ex-agr., March (8:30): 0.1% prior
- Import prices ex-oil, March (8:30): -0.5% prior.
- Initial jobless claims (8:30): 299K prior
- Retail sales, March (8:30): 0.6% expected, -1.4% prior.
- Retail sales ex-auto (8:30): 0.5% expected, -0.6% prior
- Michigan sentiment, prelim., April (9:45): 88.5 expected, 88.9 prior
April 14
- Capacity utilization, March (9:15): 81.4% expected, 81.2% prior
- Industrial production, March (9:15): 0.5% expected, 0.7% prior. |
