InvestmentHouse Weekend Update:
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- Economic worries weigh market down once more, but indices hold their trends in lighter volume.
- Market prospers with a lower PPI, Fed on hold, but regional manufacturing slowdown combined with housing stokes recession fears.
- Bond yields continue their decline as treasuries also benefit from the money flowing out of commodities, emerging markets.
- And suddenly it is the last week of September with the market sporting gains.
- Window dressing versus the need for a further pullback.
Stocks finish lower on the week, testing the last upside leg, holding their trends.
Friday the market started a bit weaker, continuing the Thursday slide. This followed a solid break higher Wednesday after stocks looked ready to test further, spurred by ORCL earnings and a Fed still on the sideline. Though lower Friday, the sellers were still mostly at bay, but the bids dried up, and without anyone willing to buy it doesn’t take many sellers to send things lower. The market spent about three hours trying to find bottom. NASDAQ fell through its 200 day SMA but found footing at the old 2004/2005 up trendline. SOX fell through the 18 day EMA but held its near summer trend. SP600 crashed its 200 day SMA as well, but managed a rather decent move off its 50 day EMA. SP500 and DJ30 performed the best, tapping the 10 day EMA and rebounding modestly.
After that test the indices moved laterally for two and one-half hours, then found a bid in the last hour, rebounding off those support levels. A modest move and mostly driven by some position squaring and covering ahead of the weekend, but it bounced stocks a bit off of that support tested intraday.
It certainly looks simply like a test of the last move higher, the fourth leg off of the July low, particularly for the large cap NYSE indices and NASDAQ. SOX and SP600 are testing as well, but as they started this move lower in their patterns they appear to be under a bit more pressure. Still, this is just what we expected after this fourth leg that saw SP500 and DJ30 reach for the May highs, and the market is acting according to what it showed. Indeed it did fairly well Friday even with the losses as SP500 and DJ30 avoided reversing and selling off after testing their May highs. As noted, all the indices held their trends, and that is also a positive.
Technically, you had some selling once more, but the volume dried up after some Thursday distribution on NYSE. A Jewish holiday had a lot of traders leaving early and that truncated the volume, but regardless of the cause the market avoided another day of distribution as most indices faded for the second straight session (SOX has tested for over a week). As noted, growth indices gave up some near support, but all held their recent, and in the case of NASDAQ, its longer term, trend. Downside breadth swelled to -2.2:1 on NASDAQ, but held more or less steady on NYSE. Leadership mostly faded as well, but managed to hold near support. There were some cases of high to low reversals, i.e. up strong on Thursday with a breakout only to collapse back Friday. That is a sign of some market weariness when breakouts cannot sustain themselves and indeed immediately reverse. As next week begins we will be watching for any renewed distribution and whether breakouts give themselves up.
So far it is just a pullback like all the others on this run. Some distribution but sellers are not in control, and leaders are for the most part still continuing their advances. This time, however, SP500 and DJ30 are coming back from their old May highs and the move is four legs old. Time to be a bit more vigilant in the event more selling starts, but we also have the last week of the quarter working for us. Those stocks that have performed well will likely continue doing so as funds swap out of losers and buy some of the winners for some window dressing in the quarterly reports. Seems kind of silly, but it goes on each quarter, and it can sustain this move
THE ECONOMY
This past week the crowd started changing its tune with respect to the economy . . . again. For most of the past year, the mindset was anything slowing the Fed down was a positive. Sure there was some backwash from time to time as investors worried the economy might slow too much, but overall the party line in equities was you had to get the Fed out of the way first. That is quite true; given the Fed’s history you want it out of the way as soon as possible to avoid overkill. Of course, history also shows the Fed rarely, rarely, rarely (and we mean rarely) ever stops slowing the economy before it does real damage. It doesn’t want to hurt it, but as in ‘Of Mice and Men,’ it has no concept of its strength over the economy and kills off prosperity when it just means to help. Thus it is almost a death wish investors hold: you want to Fed out of the way but you know if it is that likely means interim pain. Maybe not a death wish, maybe just some form of sadomasochism, knowing you have to endure the pain to get to the pleasure.
As in 2000, views of the economy’s ability to continue its expansion remain overall positive in most cases to downright giddy in some. There is the other end of the spectrum warning of a severe problem what with housing cratering and high consumer debt, but just as there are always cheerleaders who see no evil (remember Joe Battipaglia in 2000?), there are gloom and doomers who see only evil. Housing is in a fast fall now. The evidence is very clear in all aspects of the sector, but one of the most telling is the continued decline even as interest rates are in a dramatic decline. If low rates cannot spur buying, that is a sign of a slumping sector.
Thursday the overall sanguine view of the economy was rocked some when the Philly Fed, a very volatile regional manufacturing report anyway, plummeted from 18.5 to -0.4. The swing was so dramatic it almost screams aberration. Still it gave stock investors a dose of economic queasiness and helped spur a reversal of the Wednesday break higher. Stocks have not broken lower by any means. The patterns developing since April and May are still holding, and one of the best indicators of economic slowing is the market. It peaked in early 2000 and sold hard, recovered to a July peak, but then topped again in September and it was all over but the crying.
That is one reason we are watching this test of the May highs by SP500 and DJ30 so closely. This is the fifth base since the October 2002 bottom (on NASDAQ; fourth on DJ30), and while that does not mark in stone a top, it is an indication a bigger test may be near. There are already signs of economic slowing, more than in 2000 when the Fed stopped that hiking campaign. Thus you could argue the Fed hiked further into those slowdown than it did in 2000, and that is not great news. Of course the Fed has been more mature in its handling of money supply this time around, steadily bringing it down but not turning it off cold turkey as did the Greenspan Fed. It yo-yoed money supply up and down, pouring cash in ahead of Y2K even as it tightened rates to slow the economy, then yanked it out 100% in March 2000, put banks on restriction, and hit the economy with a 50BP hike in May. Not good management as the results showed. That doesn’t change the fact, however, that we had signs of slowing even as this Fed continued hiking, and the slowing is only picking up speed. Maybe the bond market is right in predicting rate cuts by year end. That remains to be seen. Stocks have not cracked yet.
Some say bonds are telling a different story this time, but they miss the big picture.
Ah the bond market. Its predictive powers are extolled and dismissed, at times in the same breath. Greenspan was out in 2005 saying the flattened yield curve did not mean anything because it was due, in some part, to foreign buyers of treasuries, recycling all of those petro-dollars, etc. He could never say how much was due to that, however, something he did admit but no one seemed to own up to. They preferred to focus on the foreign buying as the sole reason for the decline in yields.
Bernanke picked up on that theme, but some scholars say he doesn’t really believe it that much, but was in a position of carrying on the Greenspan mantra at the first part of his tenure. Right now with commodities tanking and emerging markets not emerging so fast, a lot of that money that was swinging for the fences in pork bellies and Thai coffee houses has returned stateside, looking for more safety. That, the non-bond believers say, shows the rally in bonds and the drop in yields (and the inversion) is not your father’s flat curve, i.e. is not predictive of an economic slowdown.
Sounds pretty logical; that money has to find a home somewhere when those other markets are not so favorable anymore. But you have to ask WHY is the money going to safe havens? If economic times were going to remain good overseas in these markets the money would stay there. If commodities prices were going to move higher due to demand, they would be soaking up that money. Instead there was a bubble, a blow off top in commodities and emerging markets, and they are now correcting. The money is moving into US stocks and bonds, looking for safety in US securities. That happens in every economic slowdown; money seeks safety. When it does it comes in to US treasuries and that drives down yields, just as in EVERY economic slowdown. Thus this influx of capital that drives US rates lower is a natural part of every economic slowing, and is not an indication of the bond market’s lack of predictive power. It is PART of that predictive power as money anticipates slowing and seeks safer homes.
Further it is not all massive buying as you would assume from the financial stations. The most recent data from July shows net foreign purchases down 50%. With investment taking a dip, you cannot explain lower bond yields on vast quantities of foreign money pouring into the system. It is having its effect as usual, but it is not the only power at work. Thus it is wrong to just say the bond curve doesn’t mean much anymore, just as it is wrong to say the Fed got it right this time. Both remain to be seen, but given history, it is a really aggressive bet that bonds are totally wrong and the Fed is going to deliver one of its rare soft landings. If that is the case, I am buying one lotto ticket this weekend and I expect to win.
As I said, it remains to be seen who is right. Stocks are still moving higher while bond yields are inverted and moving lower. Indeed, this past week the inversion between the 2 year and the 10 year hit its highest (10BP) since March before correcting back to close the week at 7 BP (4.67% on the 2 year versus 4.60% on the 10 year). A modest inversion but a pesky one that won’t go away. For the week, however, bond yields fell a whopping 20BP, the most since April 2005. All the while the spread between the Fed Funds rate (5.25%) set by the Fed widens, indicating the bond market is predicting much slower times than the Fed (after this Wednesday meeting its statement said it was still leaning toward an inflationary bias). As noted above, the bond market anticipates Fed cuts by year end. For now stocks are holding up nicely, but with the Dow and SP500 coming off tests of the May highs after a long run higher it is time to be vigilant and watch how the stock market responds to the pullback from those May highs.
THE MARKET
MARKET SENTIMENT
VIX: 12.59; +0.34
VXN: 18.23; +0.03
VXO: 12.2; +0.24
Put/Call Ratio (CBOE): 0.92; -0.05. Could not close above 1.0 even with the continued selling. Not ratcheting sharply higher, and with this one it takes several closes above 1.0 to start indicating a turn.
NYSE Short Interest:
Closed the week at 6.77, off the 6.94 five year high hit two weeks back but still at high levels. Lots of expectation of a decline, and that is a contrary indicator. It is still a secondary indicator, however, and how the market responds to this stall at the May highs in terms of price and volume and leadership will be the most important indicator.
Bulls versus Bears:
Bulls: 47.4%. Up again, climbing from 45.8%, 43.2% , and 42.1%. Climbing steadily up toward the 55% level considered bearish. Still below the peaks from January and April, and well below the 55% level considered bearish, but it is heading that way and getting too high.
Bears: 33.7%, down from 35.4%, but still well above the 20% level considered bearish. It is the holdout but the bulls are making the move. This matches the 33.7% hit the two prior weeks. Back into the decline from the 37.1% hit in July. The 37.1% was the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover. Hit a new post-2002 high in that late June move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: -18.82 points (-0.84%) to close at 2218.93
Volume: 1.688B (-17.64%). Good fade in volume, dropping to below average for the first time in two weeks. A holiday had many knocking off early, but nonetheless, no distribution as it came back.
Up Volume: 415M (-183M)
Down Volume: 1.248B (-178M)
A/D and Hi/Lo: Decliners led 2.2 to 1. It was not just a large cap tech move; indeed, the large caps held up a bit better with just a 0.76% decline.
Previous Session: Decliners led 1.74 to 1
New Highs: 47 (-60)
New Lows: 71 (+2)
The Chart: (Click to view the chart)
NASDAQ gapped modestly lower and then sold through its 200 day SMA (2165) before tapping close to its old August 2004/April 2005 up trendline (2209) and the early September high (1207) before rebounding to shave a third of its losses by the close. So far so good as NASDAQ tests the fourth leg in its run off the July low and continues building the base that started in April. Since coming back from the summer, NASDAQ has shown overall accumulation and good market leadership. After this test we want to see that continue with more rising volume on the next break higher. Will likely test the up trendline and perhaps the 18 day EMA (2204) again before it makes the next move, maybe down to the early July high at 2190. That will make things just uncomfortable enough to shake out the index for the next leg.
SOX (-0.61%) fell through the 18 day EMA (451.45) Friday, continuing its decline for the week after moving laterally the week before. SOX started testing earlier than the rest of the market, and we were looking for it to start back up ahead of the market, but it ran into the economic slowing issues. Chips are quite sensitive to that and it faded, but did manage to hold above the trendline (445) from the July low as well as a range of support from June and late August. This is where it needs to hold the line and resume the move.
SP500/NYSE
Stats: -3.25 points (-0.25%) to close at 1314.78
NYSE Volume: 1.448B (-14.32%). Volume faded to below average as the NYSE indices posted their second down session in the pullback. Good to see the volume contract from the modest distribution on Thursday.
A/D and Hi/Lo: Decliners led 1.62 to 1. Very modest once again, coming back from close to -3:1 earlier in the session.
Previous Session: Decliners led 1.4 to 1
New Highs: 71 (-71)
New Lows: 53 (+19)
The Chart: (Click to view the chart)
Nice test of the 18 day EMA (1310) on the intraday low and a rebound to cut more than half its losses. Lower volume on the selling shows no distribution, and the rebound, while mostly due to squaring up before the weekend, was still a good indication. Second downside session since testing the May high on the Wednesday and Thursday highs. It made the test down to next support but this is likely not the extent of it. Another test of that level (also marked by the top of the March/April trading range) is likely, and we could easily see a move to 1300 before it is ready to make another run at the May highs. A bit of distribution on Tuesday and Thursday, and thus we will be watching volumes closely this week.
The small cap SP600 (-1.00%) broke below its 200 day SMA (372) and folded for the largest loss of the session. It managed to rebound off the 50 day EMA (367) as well as the up trendline from July (368) and cut some of its losses. That tap represents just about as far as it needs to come back on this move and still make a higher low. It will likely test again this week before it makes the next attempt higher.
DJ30
The Dow showed that same action the other large caps demonstrated, tapping at the 18 day EMA (11,470) on the low and rebounding to recoup much of its losses. Volume was lower and below average, indicating no dumping, just a modest dip after failing to take out the may high. That beats the heck out of diving on rising volume after that failure. Not sure it is done here, and a test of the 18 day EMA again is in order, and it may come on back to 11,400 where there is some pretty significant support. It will likely want to inflict a bit more pain to the downside before it is done.
Stats: -25.13 points (-0.22%) to close at 11508.1
Volume: 198M shares Friday versus 241M shares Thursday. Volume faded as DJ30 continued its test. Pretty solid action overall but still likely to test further before it is done.
The Chart: (Click to view the chart)
MONDAY
A bit more of a shakeout on Friday as expected, with varying degrees of damage done. SP600 had the roughest go of it, and it also has the most problematical pattern. On the other end of the spectrum you have the large cap NYSE indices, coming off tests of the May high, thus far holding up. In the middle you have NASDAQ and SOX, the backbone of this move off the July lows (before this period they were dead to us). The market needs all indices to pull together, but SOX and NASDAQ are going to be key once more to the next move.
This week brings two opposing forces together. It is the last week in September, and while that conjures some visions of selling just because the market is up for a month often associated with selling, the competition is between window dressing in the last week of the quarter and inflicting more pain on the downside before an upside rebound starts anew.
While it is discounted by some, there is definitely buying of the winners and selling of the losers in the last week of a quarter. Energy has been on the dive, and it will likely see more pressure in the week as additional shares are sold. Big cap techs have been in the news with respect to the upside of late, and thus we could see more buying in those names. Retail surprised many with its strong move, and some of the big names could see some more buy side pressure for the same reason.
There is also the pullback underway, and though the indices rebounded some to close the Friday session, they will also likely sell some more before they are ready for any serious upside move. The market tends to apply enough pressure to get the doubts and fears stirred back up and the selling started, and then it relents and resumes the move. In short, it makes the dip start to hurt and then resumes the move. That is why you often see a near term pullback undercut near support intraday and then stop the bleeding with a rebound.
If we get the continuation test to start the week, say Monday and Tuesday, that would be good. That would keep the pressure on and build up enough for a rebound, particularly if the indices test to the lower support levels. That would be a good set up for buying to end the week as funds move in to pick up the leaders at a lower price to spruce up the quarterly statement. A deeper test might also be enough to break DJ30 and SP500 through the May highs and keep the upside move going.
Now if the upside comes first, i.e. early in the week, that is likely bad for the market overall. After that posturing is over the market then lacks a driver and turns back over. The selling could be much more intense on into October. That is nothing new for anyone who has been in the market for a few years. That may set up a nice October bottom, but there would be considerable pain first.
Thus we look to see how the week opens and that will clue us in to what to expect for the rest of the week and the end of the third quarter. Of course that also means earnings are coming and there is some trepidation about their strength. This is the quarter many predicted a slowdown to finally show up. There is slowing so we will see some earnings deterioration. That could mean a rough October earnings season, but once it is over that may also set the stage for a rebound into year end. First things first, however, and that starts with how the market opens: window dressing buying or a further downside test.
Support and Resistance
NASDAQ: Closed at 2218.93
Resistance:
The 200 day SMA at 2222
2234 is the June 2006 peak (intraday)
2250 is the March 2006 closing low.
2316 from interim tops in January and March 2006 (the 2250 to 2316 range is the Q1 trading range for NASDAQ)
2376 is the April high, the post-2002 high
Support:
2209 is the August 2004/April 2005 up trendline
The 18 day EMA at 2204
2190 is the July 2006 high
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2177 is the December 2004 high.
2168 is the August intraday high.
The 50 day EMA at 2166
2158 from the May 2005 low.
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows
S&P 500: Closed at 1314.78
Resistance:
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
1315 is the May and May 2001 peaks
1311 is the April closing high.
The 18 day EMA at 1310
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 50 day EMA at 1294
The early June high at 1288
The late January peak at 1285
The 200 day EMA at 1281
1280.37 is the recent July peak.
1268 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,508.10
Resistance:
The 10 day EMA at 11,516
11,642 is the May 2006 closing high
11,670 is the May intraday high
11,750.28 is the all-time high
Support:
The 18 day EMA at 11,470
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 50 day EMA at 11,330
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,114
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
September 25
- Existing home sales, August (10:00): 6.25M expected, 6.33M prior
September 26
- Consumer Confidence, September (10:00): 102.5 expected, 99.6 prior
September 27
- Durable goods orders, August (8:30): 0.8% expected, -2.5% prior
- New home sales, August, (10:00): 1.05M expected, versus 1.07M prior
- Crude oil inventories (10:30)
September 28
- GDP, final Q2 (8:30): 2.9% expected, 2.9% prior
- Chain deflator (8:30): 3.3% expected, 3.3% prior
- Initial jobless claims (8:30): 318K prior
September 29
- Personal income, August (8:30): 0.3% expected, 0.5% prior
- Personal spending, August (8:30): 0.2% expected, 0.8% prior
- Michigan sentiment, revised (9:45): 85.0 expected, 84.4 prior
- Chicago PMI, September, (10:00): 57.0 expected, 57.1 prior |
