InvestmentHouse Weekend Update:
investmenthouse.com
- SP500, NASDAQ ride in-line jobs report, August revisions to new post-2002 highs.
- Jobs report: Okay, so what if the government was off by 93,000?
- Will Fed cut another one after stronger jobs report?
- Still a lot of negativity regarding the market even as indices break higher.
- With the continuing economic re-recovery, time for industrials to resume their move, and small caps are trying to help as well.
Just right jobs report pushes SP500 to a new high.
The market was set up to move higher and looking for a trigger. The in-line jobs report (110K versus 100K expected) and a rather massive revision to August (+89K from -4K) provided the spark to break the indices higher. Well, it provided the spark, but it was not an explosion higher. Part of the powder didn't ignite. SP500 broke to a new all-time high and NASDAQ added a lot to its earlier move to a new post-2002 high. DJ30 was up, but its move was nowhere near its large cap brethren, and after pushing to a new high intraday it faded. Held a gain, but a mere shell of the other indices.
The jobs report was the keynote address, but there was other news pre-market, some good, some not so good. RIMM was up on its results; once again after hours action does not necessarily represent what happens during the full session. RIMM dragged AAPL along with it along with some other big techs. On the flipside, NBR (drilling) guided lower due to a falling North American rig count. MER warned re its Q3 due to heavy write-downs in assets related to the sub-prime issues. Outside the jobs report, life goes on as usual.
Stocks started higher out of the gate. The dollar started higher as well, pushing oil a bit lower and keeping a lid on the energy stocks again. After that higher open the action was up and down through midmorning. Then the market broke from that range and headed nicely higher. Some word that the commercial paper market was improving as a few companies were placing their paper, and the Fed's Kohn had some decent things to say about the prospects of more Fed action.
The upside move paused over lunch, but stocks were back up into the afternoon session. Techs were the dominant leaders but the small caps were up nicely as well. Metals started to move in the afternoon, one of the leadership groups on the last leg that backed off and was lagging on the current attempt. They were still not blowing things away as some late profit taking took back some of their nice gains. As noted, energy was lagging; still set up well, but thus far unable to take up the leadership mantle it had on the market's last leg higher. That left it to the techs, and they did an all around decent job at holding the gains together.
Technically the action was solid . . . for the most part. SP500 broke to a new all-time high, testing the move intraday and then closing with room to spare over the July high, completing the move out of the cup with handle base. NASDAQ did the same, i.e. breaking out from its cup with handle base as well. It already broke to a new high to start the month and quarter, and the Friday break higher was an exclamation point on that move.
Volume was up and actually not bad on NASDAQ. It topped 2 billion share, approaching the levels hit as NASDAQ started its stronger move higher in mid-September. Still below average, however, given the huge volume during the July and August selling that jacked up the average level of trade. NYSE volume was up as well, but it was rather puny, coming in less than the Monday new money for the month trade. Breadth was great at 3:1 NYSE, but that doesn't really make up for the chronic lack of volume on NYSE.
Notably lacking was DJ30 with respect to a move to a new high. As noted above, it put in a decent move but it could not hold above Monday's peak that took it to a new high. SP600 didn't make a new high either, but unlike DJ30, it was running hard toward the old high, posting the best move in the market outside of NASDAQ 100.
Leadership was clearly in the hands of a few tech stocks such as RIMM and AAPL. Techs continue to perform well in general, though the large cap techs are dominating. Once more, however, the small caps were there as well, posting strong moves as the economy continues to look as if it is going to once more resume its growth plane. As we have discussed, the economy was emerging from a mid-cycle slowdown in Q2 and into Q3 when the credit freeze hit. That really hammered the small caps as the fear was the credit issues would stall the economy, and small caps have to have growth, solid growth, to prosper. They are surging back up, leading the market in percentage moves all week, and that is an indication that the economy is emerging, once again, from a pause and has good growth potential ahead of it.
You won't hear much of that kind of talk on the financial stations. For one thing, there is still a lot of pessimism about the US economy in general. The litany of terrors is cited every day: sub-prime, credit, weak dollar, inflation, declining consumer. You even hear how the market is a poor indicator of future economic performance. Don't tell that to the market back in 2000 when it pitched over and the economy collapsed after it. And of course the rally that started off the October 2002 low and the surge that preceded the huge gains in GDP in Q3 2003 was not forecasting the return to prosperity. Throughout US economic history you have market rallies followed months later by surging economic growth. Yet some still pick at the time or two that growth lagged longer than usual, claiming that is the rule rather than the exception. That is fine. As long as there are those out there refusing to acknowledge fact and remain negative, that is good for the market rally as the market moves its best when there is a lot of doubt and worry. This has been a strong move higher, befitting the amount of issues and worries covered each hour of each trading session on the financial stations.
THE ECONOMY
Jobs report shows August report was wrong. That is what is so right about it.
You have to wonder. The government reports a loss of 4K jobs in August when expectations were for a gain in the 140K range. A month later it issues an 'oops' report, noting that jobs were actually up 89K; nothing like a 93K miss. We figured the August number was an outride, i.e. just plain did not reflect reality, and that was the case. It certainly doesn't add to the already crumbling confidence in the government's ability to collect and compile data about the economy or anything else for that matter.
As for the September report, it was basically in line at 110K versus 100K. With the revisions to the prior two months 118K non-farm jobs were added back in. Average hourly earnings rose 0.4% versus the 0.3% gain they have held for months. That put the year over year level at 4.1%, a very solid expansion considering all of the talk we are hearing about how US wages are terrible. Of course that raised comments about 'wage-led' inflation. For once we would like to have an expansion with some wage increases without having to hear about this bogus, unsubstantiated theory.
Even with the upside revision that brought cheers from many commentators, the market did not run higher because the results were strong. No, the numbers were still quite weak, just not the gut-punch level the initial August report of negative growth suggested. The revision suggested no collapse, but the overall numbers were weak. 89K? Even if that was reported in August it still would have been a big letdown versus the 140K expected. No, all the revision did was put the numbers in the 'just right' category for the market given its desire for continued Fed rate cuts.
Will the Fed still be ready to keep cutting them?
Indeed, despite the 'whew' many were letting out Friday and the talk of a strong economy as evidenced by the jobs report, quite frankly it showed nothing of the sort. To backtrack some, recall how some said the August jobs report and the initially reported 4K jobs loss was why the Fed cut rates. If you believe that, then the revision to +89K would prompt you to conclude that the Fed would not cut again and probably be looking for the opportunity to 'take back' that cut. We heard that on Friday from the uninformed or the shallow thinkers.
The Fed did not cut because of the jobs report. Bernanke's writings show he knows jobs are a lagging indicator, and the other more leading indicators simply did not jibe with that jobs report. As we said at the time, the Fed cut rates because it feared that the credit freeze on top of the sub-prime concerns would stall the economy and lead to recession as such contagions had done in the past. Friday FOMC member Kohn confirmed this with his candid comments as to why the Fed cut by 50 BP: the Fed cut in order to offset tight credit and promote growth, noting it was better to respond too rapidly versus too slowly. He noted that with core inflation trending lower (core annual PCE growth at 1.8% last month) the Fed had room to work with.
As we noted at the time, the weak August jobs number was additional cover the Fed could use to cut rates if it wanted to. Kohn's comments confirm this. Given the Fed cut to prevent a further contagion from leading to recession, the fact that jobs 'recovered' is not going to change anything with respect to whether the Fed cuts rates again or not.
Remember, the Fed was saying before the credit freeze hit that the economy would grow below its potential. Bernanke said this to Congress in his son of Humphrey-Hawkins testimony, and several other Fed presidents and governors echoed this position. After the credit crunch hit the Fed had even less reason to believe the economy would improve its growth, i.e. it likely expected growth to slow even more as a result. Thus with the Fed viewing the economy with even less momentum than before, the jobs revisions won't impact its view regarding rate cuts.
Given the Fed's moves ahead of and during the credit crunch and the Kohn comments, it is pretty clear that the Fed, through Kohn (and likely others to come this week) is outlining why the Fed will likely cut at the next meeting here in October. In short, the Fed was worried about sub-trend growth before all of these issues hit, and now that they have hit and the Fed has cut in response, a few more jobs added due to a revision are not going to change its course of action. The only real question is whether the Fed cuts another 50BP or just 25BP. If the leading economic data continues to improve and show a second re-acceleration out of the mid-cycle slowdown, 25BP is likely the number. Much depends upon how the credit issues improve before that meeting, however. If they are not better, the Fed will do what it has to in order to get that market opened up to avoid any chance of a slowdown leading to a recession.
THE MARKET
MARKET SENTIMENT
VIX: 16.91; -1.53
VXN: 19.77; -1.69
VXO: 16.05; -1.97
Put/Call Ratio (CBOE): 0.78; +0.05
Bulls: 56.5%. A second week above the 55% level considered bearish. The theory is that when too many investors or advisors are bullish then most of the money is in the market and there is nothing ready to come in off the sidelines to drive prices higher. Up from 55.6% last week and on a steady climb from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 25.0%, down from 25.6%. Bears continue their decline, falling steadily just as bulls have risen steadily. Down from 27.0% three weeks back and 31.0% the week before. It held at 37.4% for 3 weeks prior to that. Still well off the very low 18% hit in August, and it topped the June 2006 peak (36%) on this run. That June peak eclipsed 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: +46.75 points (+1.71%) to close at 2780.32
Volume: 2.018B (+16.92%). Volume was the best in two weeks, since back when the Fed cut interest rates. It was still below the pumped up average volume level (due to the July and August selling volumes), but it was good that the trade topped the Monday level when the new money came into the market. This shows that some real buying came into the technology sector. That is what you want to see on breakouts, and that is what this was.
Up Volume: 1.632B (+744.655M)
Down Volume: 364.687M (-450.232M)
A/D and Hi/Lo: Advancers led 2.84 to 1. Very nice breadth as NASDAQ broke higher. The large caps were leading (NASDAQ 100 posted a 2.09% gain) but it was not a large cap only move.
Previous Session: Advancers led 1.28 to 1
New Highs: 139 (+75)
New Lows: 23 (-9)
NASDAQ CHART: Click to view the chart
NASDAQ gapped higher, clearing the early week high on the initial move. It showed the classic bullish intraday action, i.e. the low to high move that shows the session building strength throughout. The fact that it gapped higher and held the gap shows its strength. NASDAQ is not at a new post-2002 high and is leading the market once more after it had conceded some to the SP500 and the industrials, energy and metals. NASDAQ is growth, and with it leading and the small caps surging higher, there is an argument for growth in the US.
SOX (+0.98%) rebounded but it was nothing near a breakout. It remains well-entrenched (mired is more accurate) in its long base. Not a lot of strength found here.
SOX CHART: Click to view the chart
SP500/NYSE
Stats: +14.75 points (+0.96%) to close at 1557.59
NYSE Volume: 1.258B (+14.34%). Volume was up on SP500's breakout and the small cap surge, but it was still lower than Monday and way, way below average. Just not the kind of strength you would like to see on a breakout move.
Up Volume: 1.051B (+401.112M)
Down Volume: 188.261M (-244.59M)
A/D and Hi/Lo: Advancers led 3.14 to 1. Excellent breadth as the small caps again led the market higher.
Previous Session: Advancers led 1.65 to 1
New Highs: 167 (+123)
New Lows: 1 (-7)
SP500 CHART: Click to view the chart
The large caps gapped higher as well and ran on into the close. It moved through the old high at 1553 and the July peak at 1556, but it had to fight to hold the all-time high on the close. It did, but as noted, the volume was not the kind that instills much confidence in the move. That doubt is what we are hearing on a daily basis, and low volume is a very important consideration. For the moment, however, SP500 is following the NASDAQ while the techs do the leading. That is okay for now but you want to see volume improve as the energy and other recent leaders now taking a breather resume their moves.
SP600 (+1.83%) was again one of the percentage leaders in the market as the small caps continue their recovery and surge toward a new all-time high, just 4 points off that level. As discussed above, the rise in the small caps and their recent relative strength comes on the heels of the Fed rate cut and indicates a belief in the market that the economy is going to post better numbers down the road than currently expected.
SP600 CHART: Click to view the chart
DJ30
The blue chips bounced off of that tight doji on the candlestick chart from Thursday and, for a time, traded at a new all-time high (14,124.54). Volume was up but still below the Monday level (as on NYSE), and but the close the Dow faded back from that new high. It held a solid gain but surprisingly faded back from the prior high as the rest of the market broke higher and hdle the moves.
Stats: +91.7 points (+0.66%) to close at 14066.01
Volume: 183M shares Friday versus 143M shares Thursday. No real volume to push the Dow or get it to hold the new high.
DJ30 CHART: Click to view the chart
MONDAY
A heavy week of data once more even after the overly-hyped jobs report is out. FOMC minutes and retail sales are the highlights, but we can also expect a lot of Fed-speak during the week along the lines of Mr. Kohn because this is the last week before the Fed enters the quiet time ahead of the 10-31-07 FOMC meeting (fitting it is on Halloween).
It is also a week that will see more earnings and earnings warnings as earnings season really gets underway. RIMM got the techs off to a good start, but of course, not all stocks, indeed not many, are RIMM.
Whenever the indices break to new highs and earnings season is at hand you have a feeling that stocks have run up ahead of the news and then are subject to fading when the results start to come out. In July stocks were up somewhat heading into the season, and they got a boost with the first earnings. As is typical, however, after the general gist of the season became known the impact faded and so did prices. Of course that was also the time the market was on the precipice of the sub-prime and credit crunch sell off.
There are stocks that ran higher on into the start of Q4, many of which made us a lot of money and are still doing so. They are extended, and earnings likely won't blast them much higher regardless of how good they are. On the other hand the market has broken higher once more, putting the July and August swoon behind it. Volume is not that great overall but investors are pumping money into certain areas, e.g. techs, as the jobs and other data suggest, golly gee, the expansion is not over. Indeed, some industrial stocks will start moving higher again given that the US and world economies are not collapsing. CAT started higher Friday. Metals started to spark up again, and energy stocks still look very good to move higher once more.
There will be a lot of guessing as to what the market will do after this breakout and as earnings start to roll out. As noted, we have a lot of positions that have run high and continue higher. They are more vulnerable to earnings even if the results are good. Thus we have taken some gain on the path higher and we continue to move up our trailing stop points.
As for new plays, as noted we still see a lot of stocks set up nicely to break higher. As the recent leaders run out of gas and test back to set up once more, the next wave will make the break higher. Energy, metals, industrials, and Chinese stocks did much of the running on the last move higher, and as they put in some R&R the past two weeks the techs moved higher. With some of the early running techs and NASDAQ stocks a bit extended, they are likely to test as earnings hit. Then we see if the next wave will come forward and make the break higher and thus extend the breakout. Again, we see many good stocks in position to do just that as the rotation seen the past month continues.
Support and Resistance
NASDAQ: Closed at 2733.57
Resistance:
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2778 from a July 1999 peak
2745 is the November/February up trendline
2725 is the July high
The 10 day EMA at 2720
2702 is the November/December/February up trendline
2673 is the early July high
2634.60 is the June peak
The 50 day EMA at 2633
The 90 day SMA at 2612
The 200 day SMA at 2536
S&P 500: Closed at 1557.59
Resistance:
New high!
Support:
1556 is the July intraday high
1553 intraday high from March 2000 used to be the all-time peak
1541 is the early June high
1539 is the mid-June intraday high
The 10 day EMA is at 1536
1534 is the early July high
1509 is the July 2006/March 2007 up trendline
The 50 day EMA at 1500
The 90 day SMA is at 1499
1490.72 is the early June closing low and early August peak.
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1471
1461.57 is the February 2007 high.
1440 is the mid-January high
1427 represents some interim peaks from December 2006 and the early August low
Dow: Closed at 14,006.01
Resistance:
The July high at 14,022
7.0% above its 200 day SMA (13,038). When it gets near 10% it starts to struggle.
Support:
13,975 is the old channel line
The 10 day EMA at 13,928
The August high at 13,696
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The early July peak at 13,671
The 50 day EMA at 13,582
The mid-May peak at 13,556
The 90 day SMA at 13,513
13,255 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 200 day SMA at 13,062
12,845 is July closing low
12,796 at the February 2007 high
12,518 is the August intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 9
- FOMC Minutes, Sept. 18 (2:00):
October 10
- Wholesale inventories, August (10:00): 0.3% expected, 0.2% prior.
- Crude oil inventories (10:30): +1.1M prior
October 11
- Initial jobless claims (8:30): 371K prior
- Trade balance, August (8:30): -$59.0B expected, -%59.2B prior
- Treasury budget, September (2:00): $100.0B expected, $56.2B prior
October 12
- Retail sales, September (8:30): 0.2% expected, 0.3% prior
- Retail sales ex-autos, September (8:30): 0.3% expected, -0.4% prior
- PPI, September (8:30): 0.4% expected, -1.4% prior
- Core PPI (8:30): 0.2% expected, 0.2% prior
- Business inventories, August (10:00): 0.3% expected, 0.5% prior
- Michigan sentiment, Oct. preliminary (10:00): 84.0 expected, 83.4 prior |
