InvestmentHouse Weekend Update:
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- Jobs data gooses market, but cannot hold third day of gains to close out week.
- Jobs growth slows: when lagging indicators slow it is past time to STOP with the rate hikes already.
- ECRI shows slowing as well, and of course, that inflation has already peaked.
- Market still seeking a follow through and leadership as it sets up to try and continue the rebound.
Stocks post a flat Friday. After two solid rebound sessions we will take it.
The weaker jobs data helped trigger the next upside move, but after two solid gains off of the test of the May sell off lows, stocks could not hold the move. It was a case of a good rebound followed by more perceived good news that pumped up the futures only to have all of the fuel burned out by the open. Stocks jumped out of the gate, extending the rebound that started Wednesday, but hit the apex in the first 10 minutes.
This was pretty much as we expected, but the jobs report provided more stimulus than we thought it would and thus we did not get the steady rise through the morning and then the afternoon fade. Instead, the indices hit their highs at the open, fell off sharply, and then mounted a modest but dogged recovery from late morning to the close. That afternoon move brought the indices basically back to flat with the NYSE positive and NASDAQ slightly lower. It was no wimpy move. NASDAQ lost 30 points from high to low, then regained 15 points to close flat. SP500 recovered 8 points over the afternoon to close up 2.51.
That recovery was important. Early in the session NASDAQ and SP500 moved through key resistance at the 200 day SMA and 50 day EMA respectively. As we anticipated, however, they were unable to hold the push through those key levels after the prior two moves. While rather normal, that and the overall move Friday demonstrated some of the problems with this rebound. First, it was a decent end to the week and the Friday comeback showed new tenacity, but the market simply failed to deliver a follow through to the reversal session two Wednesdays back. NYSE put together strong volume Wednesday but not enough price movement. Thursday there was some strong price gains but volume was the shrinking violet.
Second, leadership is sparse. Ever since commodities had their blow off four weeks back the market lost a leadership component. Sure there are still some energy stocks performing well (e.g. BHI, HOC, OII) as well as some metals, but the sharp, broad surge higher that sucked up almost every stock in those sectors to begin May has popped and the majority of those stocks are at best in the process of trying to set up new bases. It was classic blow off action seen after a strong run preceding the last rush higher, and as we have discussed before, it unfortunately fooled many economists and pundits into believing inflation was jumping. That had the unfortunate result of putting a new Fed chairman on the defensive, fighting to preserve his manhood, and the market took that as a real negative, i.e. that the Fed would be forced yet again to overplay its hand and take down the economy.
But I digress. Leadership is not staking out any new territory for the most part. The Wednesday rebound saw a lot of beaten up mega cap techs lead, and that is not what a follow through is made of. Thursday was a bit better but still now clear leadership. Indeed, many of the potential leaders, simply matched the market moves instead of getting out in front and showing larger gains as would be the normal case.
Friday, however, some leaders tipped their hand. As the market was flat, the biotechs and some related medical and healthcare moved out in front. Biotechs are not defensive though healthcare is often associated with a defensive play. With the economy showing some slowing with the lagging jobs report slowing down, some investors were leaning toward some defense. At the same time there are many strong stocks still in position to strike higher.
Basically that is where the Friday close left the market. It capped two good sessions with a decent comeback after resistance tossed the indices back. Leadership is tepid but trying to step up, and there are many stocks in good position to move higher still, even after the rebound. Indeed, after the sell off many stocks are still trying to rebuild and will take more time to do it. Until they are ready we are looking at those stocks that weathered the selling well and are in good patterns, ready to move higher. If the market can deliver a breakout over this next resistance this week they will be the ones out in front. Thus those are the ones we are focusing on for the week ahead, and it is another week that is important given the lack of a clear follow through this past week.
THE ECONOMY
Lagging jobs report is the clear signal for the Fed to stop already.
The May jobs tally was mixed just as it was when the economic recovery started: non-farm jobs tepid, unemployment rate falling. That changed as the recovery improved, though the non-farm numbers did not really improve until well after the recovery was underway. The household survey that counts the self employed, commissioned salesmen, and similar workers told the story of the recovery, i.e. one where the mature big tech job creators in the 1980’s and 1990’s were sending workers home and they responded with starting their own businesses. We have come full circle from the looks of it, with the non-farm payrolls in decline again while the household survey, for now, still shows the gains. The major question is whether the next step is a falling household market, i.e. a rising unemployment rate. One thing is for certain: jobs are a lagging indicator, and when they top out it is time to admit the economic expansion is struggling.
Non-farm payrolls were a tepid 75K, well off the 170K anticipated. Further, April was written lower to 126K from 138K. During the start of the recovery we said to watch the revisions as that was the real key to the underlying strength of any developing trend. Back then all of the revisions were higher as the economy improved. How could the government miss the improvement? Because human nature is to assume things are holding their trend. Estimates are made with respect to the trend and data is skewed in line with those expectations. Only when the proof starts to pile up to show otherwise do the number crunchers start to admit to the truth. Thus the revisions to the downside are a loud and clear siren to beware of a turning trend.
Because jobs are a lagging indicator, that makes the report all the more important, particularly when we have a Fed that is in the process of deciding whether 16 consecutive rate hikes, hikes that always come as an expansion is peaking, are more than enough to remove the threat of inflation. The Fed has come from 1% to 5%, a level that is historically respectable and gives the Fed any ammunition it needs in the event of economic slowing requiring more lax monetary policy. Ironically, now that it is at 5% it may already be in the position of having to start rate cuts before the year is out.
Fortunately for the Fed the weaker non-farm jobs gives it more cover to implement the pause that Bernanke clearly wants. In addition, the average hourly earnings rose just 0.1%, much lower than the 0.3% expected and the 0.5% in April. Talk about a lagging indicator, wages is the quintessential one. Waged rise after employers have squeezed every possible productivity gain from employees and the workers are not only ready to revolt but have the ability to walk to other jobs because other companies need more employees. With slowing wage growth four years into a recovery, you have yet another sign the economy needs to be treated with kit gloves here.
ECRI continues to show inflation pressures have peaked, economic cycle may be as well.
It is always the height of irony that so many ivory tower academics with more letters after their names than in their names struggle to see the obvious every economic cycle peak. They start raising interest rates just as the economic growth rate begins to stall, and then after a sustained rate hiking campaign they argue vehemently over whether inflation is coming or going. They look at jobs, they look at wages, both lagging indicators. They look at the PCE and CPI, at best coincident indicators but likely lagging as inflation is a lagging indicator by nature. As a result they typically end up hiking well beyond what is needed because rate hikes they launched 12 to 18 months before have still not impacted the economy. By looking at where we are today in determining what to do tomorrow, they fail to take those rate hikes into account and typically way overshoot the mark.
That underscores the absolute folly of the current ‘data dependent’ Fed approach. It is looking at data backed in the cake months back to try and glean what rate hikes it should make now that won’t be felt until June 2007 at the earliest. What they need to look at are leading indicators such as housing (by nature an early cycle sector that often leads a slowdown), the ISM, construction (though it tends to show strength late as building plans are made during good times), all of which and more are incorporated into ECRI’s long leading indicators.
We reported four months ago that ECRI’s leading inflation gauge (the FIG - - future inflation gauge) suggested that the inflation cycle had peaked. It appears that was absolutely correct based on the data that continues to come in. The Fed still has 7 or 8 rate hikes yet to hit the economy and inflation is whipped on this round.
That means the real danger is not inflation, but, as some FOMC members have openly stated, going too far with tight money and stalling the economy yet again. ECRI’s long leading indicator is screaming that the Fed should back way off, and should have done so all of 2006 and not just in the June meeting.
ECRI’s long leading index peaked in mid-2005 and has trended lower since. ECRI points out this does not mean the cycle is heading into recession or even a significant slowdown – for now. The ISM, though lower, still looks healthy as it is comfortably above 50. Yet with the 12 month decline in the ECRI index, history suggests that the February peak in ISM new orders may have been just that. Industrial growth could peak in the next few months, and with high energy prices starting to bite at the lower end (as WMT, DG reported last week), the consumer might be soon to follow.
We say might because at this juncture it is not set in stone. At the least, however, with this level of rate hikes and the length of the LLI downturn, there is slowing ahead. The Fed’s current actions, though the results are delayed in their impact on the economy, will have a significant impact on how far down the economy goes. In almost all prior tightening cycles it has overshot the mark and sent us into recession because all of the fancy titles still don’t guarantee you know what to do in the real world. It is like making a trade; you know what you should do, but in the heat of the battle do you do it?
The data, as we have said for most of this year, particularly with high, sustained energy prices, suggest quite strongly that the Fed needs to not worry about inflation as much as it needs to worry about what high energy prices and its 16 rate hikes to this point have done and what they WILL DO to the economy. As we said, being ‘data dependent’ when your data is based on what has happened and does not account for the rate hikes that are yet to hit is absurd. The Fed needs to use some of that significant brainpower and think. Or simply break out the economic history books and look at what their hiking cycles result in when they get to this point and don’t recognize clear signs.
You can muddy the water with all of the ‘this time it is different’ facts you want, but the repeating issues are simple: looking at lagging data to divine what will happen down the road when the lagging data cannot possibly account for the hikes the Fed has already made. If you are playing that game you are going to lose. At least Bernanke has shown he understands that with his comments regarding housing and high energy prices, and others on the Fed have indicated the same concerns. Question is, will Bernanke have the backbone to adhere to what his knowledge tells him or will he cave in to the pressure some in the market are trying to exert? The huge irony of this is that by showing the backbone to do what he knows is right, Bernanke is seen as having no backbone to stand up to inflation. We have said it before however: ultimately the market wants the Fed to do what is right, not what is perceived in the short run to be proper. The blow off top in commodities should be one of the clearest indicators the naysayers are wrong, but you don’t hear any proper analysis regarding this wake up call.
THE MARKET
MARKET SENTIMENT
Last week saw volatility spike higher to start the week, confirming the fear in the market seen over the past three weeks. It tanked during the rally, but that is normal. As we said before, making a bottom takes time, and sentiment indicators show the conditions are getting right but not the timing of a recovery. They have shown us what we need to see. Now it is up to the market to make use of it.
VIX: 14.32; -0.2
VXN: 18.38; -0.48
VXO: 13.16; -0.18
Put/Call Ratio (CBOE): 1.26; +0.13. Closed out the week with another gain to close over 1.0. It only closed below that level on Wednesday when the market started its rebound. Thursday was likely position shuffling as the market continued its advance, but Friday as the market rolled over the put players were back in there, betting on the downside. That is a positive in our view.
Bulls versus Bears:
Bulls: 42.6%. Backing off as expected given the market struggles, down from 43.8% the week before and well off the 46.3% hit three weeks back. Still heading lower after the April peak at 53.2% and almost matching the 42.3% hit on the last low. We don’t expect it to improve much after this week given the volatile action that saw some improvement but no clear return to buying. The current level is also just above the levels hit in May and October 2005 that saw new upside runs.
Bears: 29.8%. Solid climb in bears as the selling and increasing volatility worked against positive market attitudes. That is up sharply from the 27.6% as week that was also a solid jump from 25.3% the week before. Bears have now topped the 28.6% hit on the interim high on this selling. The 33% high hit in March topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. Bears are again at a level that could help drive this current rally attempt further. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: -0.46 points (-0.02%) to close at 2219.41
Volume: 1.947B (-10.14%). Volume backed off as did NASDAQ, and not bad at all given the intraday drop to the 10 day EMA and rebound in the afternoon. It shows the sellers did not have any stomach for the selling. Below average as it was on the Tuesday selling. Overall for the week NASDAQ showed accumulation with the above average volume on the Wednesday and Thursday gains, but it was not the kind of volume coupled with a price move that gives you a clear confirmation the buyers are back after the reversal two Wednesdays back.
Up Volume: 729M (-983M)
Down Volume: 1.186B (+792M)
A/D and Hi/Lo: Advancers led 1.09 to 1. The A/D line was not bad for the week after getting crushed on Tuesday.
Previous Session: Advancers led 2.79 to 1
New Highs: 131 (+30)
New Lows: 42 (-3)
The Chart: (Click to view the chart)
NASDAQ tried the 200 day SMA (2230) Friday during the opening salvo, but could not hold after the two prior advances that were solid but not of follow through strength. It rolled over and looked like more of the same, shedding 30 points from the high. It definitely scared up the sellers as the put/call ratio jumped higher. It found support at the 10 day EMA (2203) and then recovered in a steady afternoon rebound to close basically flat. It was not likely to clear this resistance this week, particularly after no follow through strength Wednesday and Thursday. That leaves this week as another important one for the index as techs try to find some leadership outside of the beaten up mega caps and further the rebound off the short double bottom.
SOX (-0.15%, -0.71 points) rallied to its 18 day EMA (479) on the high then rolled over with the rest of the market. It found support at 470, a key level, on the low and rebounded into the close with technology overall. Key point for SOX: in a downtrend the 18 day EMA often acts as resistance. SOX needs to break this up, continuing the bounce off of its week long lateral move at 460ish along with the rest of the market.
SP500/NYSE
Stats: +2.51 points (+0.2%) to close at 1288.22
NYSE Volume: 1.572B (-6.97%). Volume fell below average after a high volume blast higher Wednesday that pushed SP600 to a follow through, but none of the other indices could follow. Volume was lower as Thursday but still above average as the NYSE indices extended their gains.
A/D and Hi/Lo: Advancers led 1.98 to 1. Solid, much better than the price advances would indicate.
Previous Session: Advancers led 3.51 to 1
New Highs: 90 (+19)
New Lows: 55 (-18)
The Chart: (Click to view the chart)
SP500 bounced sharply off the second test of the 200 day SMA (1259) in May, trying to put together a double bottom recovery. Solid move to the 50 day EMA (1289) though not a power follow through. It cleared the 50 day Friday but faded to the 18 day on the low and then recovered to close just below the 50 day. It is in a range of resistance right now, and this week it will likely test a bit more and then try another run through this level. Digging out of holes can be a tough process. It would have been more promising with a strong follow through, but it is hardly dead yet.
The small cap SP600 (+0.13%) showed similar action with a run up to the 50 day EMA (383.31) that stalled the move and sent it negative. Then the afternoon steady rebound closed it modestly positive. It too has bounced off a double bottom and faced some key resistance at the 50 day and at some price resistance at 385. Likely to slide laterally for a session or two and then try the break higher.
DJ30
DJ30 did not clear its rebound high off the May low (11,283), posting a modest loss on lower volume Friday. Unlike the other indices it looks as if it is going to form a handle at this ‘hump’ and then try the next break higher. It has stalled at the 50 day SMA (11,275) twice since the bottom of the May sell off. Now it will likely slide laterally a session or two and try the breakout move.
Stats: -12.41 points (-0.11%) to close at 11247.87
Volume: 268M shares Friday versus 295M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
Well, the market has the sentiment indicators in position, having hit levels that have sparked rallies on three prior occasions during this uptrend. The market is trying to respond, coming off of the May lows and forming a double bottom in the indices. Sentiment is still negative as evidenced by the big spike in the VIX during the Tuesday selling and the rebound in the put/call ratio Friday as the market struggled.
Basically the market has been led to the water and now we see if it can drink. Last week was the prime time to show a follow through session and it just missed out. It can still pull one off this week, though the earlier is usually the better for sustained runs. Usually; on this move there have been a couple of ‘late’ follow throughs and the market kept on moving higher.
The market absorbed a lot of information this past week and used it to its advantage with the bounce off the test of the first May low. Likely what the market is going to do this week is similar to Friday, i.e. make something of a lateral and lower move and then try to make the breakout move.
It will need better leadership than it got last week. Much of the upside move was populated by beaten up stocks making a rebound. Sure there were leaders making good moves; we bought into those. The level of leadership, however, is not convincing at this stage. Friday revealed some biotechs trying to move to the fore, and retailers are still showing some excellent action. There are also many more stocks in position to move from across the market, notably in electronics, electrical equipment and related areas. One of the early problems with this rebound was the lack of defined leadership from any one sector now that energy and commodities had their blow offs. Good to see biotechs and some healthcare stepping up; they are definite leadership caliber sectors.
Thus there is leadership in the wings, they just need something to send them higher. Friday the jobs report tried to provide the ‘no more Fed’ catalyst, but it was Friday after two upside sessions and it failed. We might very well see a delayed reaction to that this week with not a lot of heavy hitting economic reports to come. We have a bevy of plays set to take advantage of that as well as ride our current positions higher.
Support and Resistance
NASDAQ: Closed at 2219.41
Resistance:
2218 is the August 2005 peak before the sell off through October 2005.
The 18 day EMA at 2220
The 200 day SMA at 2230
2240 is closing low in February range.
The 50 day EMA at 2262
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2205 is the December 2005 closing low
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2147 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1288.22
Resistance:
The 50 day EMA at 1289
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
The October/April trendline at 1317
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
The late January peak at 1285
The 18 day EMA at 1281
1280 from the April lows
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 200 day EMA at 1259
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1225 from the March 2005 high
Dow: Closed at 11,247.87
Resistance:
The 50 day SMA at 11,275
11,283 is the ‘hump’ in the attempted double bottom.
The March 2005 highs at 11,329 to 11,335
11,340 is the October/January/February up trendline.
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
11,425 from April 2000 peak
11,452 from December 1999 peak
11561 is the DJ30 closing high
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.
Support:
The 50 day EMA at 11,243
11,159 is the February high.
11,097 to 11,137 is the last peak from the February top.
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.
June 5
- ISM Services, May (10:00): 60.1 expected, 63.0 prior
June 7
- Crude oil inventories (10:30): +1.6M prior
- Consumer Credit, April (3:00): $3.5B expected, $2.5B prior
June 8
- Initial jobless claims (8:30): 336K prior
- Wholesale inventories, April (10:00): 0.5% expected, 0.2% prior
June 9
- Export prices, May (8:30): 0.7% prior
- Import prices, May (8:30): 0.0% prior
- Trade balance, April (8:30): -$65.0B expected, -$62.01B prior |
