- Lower close Friday but only after a solid week and a strong month. - PCE remains stubborn even as consumer spending gains slow, but Fed shows an open mind. - Chicago PMI posts a solid September result, setting the stage for the national number on Monday. - Truckers keep on trucking, just not as much. - No rest for the market as window dressing money is redeployed and new money put to work.
Stocks take a well-deserved day off.
Stocks got a bit of pop from the RIMM results, and the stronger than expected Chicago PMI rescued the morning rally after it sold following a modestly higher open. The market held onto modest gains through lunch, but a tired market needs continued energy to push forward. After the morning news dissipated and the weekend drew near following another week of gains, the market ran out of gas and faded to close negative.
Volume remained very light on NYSE and was a touch lighter on NASDAQ (though much lighter than earlier in the week). That indicates there was no real selling or turn in the market, just bids drying up as investors and traders squared some positions and took some gains after the rally, the window dressing, and ahead of a new quarter. Oil was a classic example as it rebounded into the close after selling off intraday; short positions were covered ahead of the weekend, particularly after oil’s decline during the month. Heck, we were doing some of the same ourselves as we took a bit of interim gain on some positions.
Technically, the Friday action was just more of the slowdown that appeared on Wednesday. In the past six weeks the market has had just a couple of sharper pullbacks, but even those held near support and the indices continued their march higher. The move has been solid, but as with any move it gets tired. It either has to fade to near support, or if it has made several moves up off support, it takes a deeper test. This run off the July lows has made three, and if you want to be picky, four, tests of near term support as it has rallied higher. Four to five bounces are typically the max, and thus the move is getting a bit extended. No real secret there, but the market kept finding buyers as it moved into the quarter end.
Even with the pullback, there was not a lot of change in leading stocks. They slowed their move as the week progressed; we noted that midweek as leadership became sporadic with fewer stocks making moves as the week wore on. As with the market, they too are getting tired. After all, moves higher are populated by leaders.
That leaves the market a bit toppy heading into next week, following last week’s move on the last window dressing to spruce up the Q3 fund report cards. A quarter’s end, however, is another quarter’s beginning, and after buying stocks that had good moves for the quarter, fund managers will be looking for opportunities to make Q4 profitable as well. That typically means they sell some of the good movers for the prior quarter that are extended, sell out of those purchased for window dressing, and move into other stocks they feel have promise. Market leaders are good prospects, but only if they have come back some and are in position to rebound. There is also fresh money, not rotating money, that is put to work to start a new quarter.
That combination can drive a tired market even higher near term. One thing about so-called overbought or extended moves: they can get even more overbought or extended before they actually come back to test. Thus the new money can push move higher. The best thing for the market would be a pullback near term to test the moves above the May highs (DJ30, SP500) and then the move, but the market does not always do what is best for it. The risk associated with buying a further move is higher than it was a month ago. The market continues to show good action, however, despite its gains. Thus we look for leaders in position to move and act if they do. If we get a pullback and there are leaders set to move higher afterwards, that is even better.
THE ECONOMY
Personal income rises per expectations but spending falls short.
Incomes rose 0.3% as expected (0.5% in July) while spending rose 0.1% versus the 0.2% expected (0.8% in July). When you adjust for inflation, spending fell 0.1%, the first decline in inflation adjusted spending since September 2005 when the Gulf storms hit. The inflation side of the numbers show more of the same with the PCE rising 0.2% month over month (0.1% in July) and 2.5% year over year. That is a new cycle high for the yearly reading. You have to go back to January 1995 to find a higher reading (it has been matched along the way, however).
That keeps one of the Fed’s primary inflation indicators above the Fed’s internal comfort zone, and ostensibly the Fed on continued inflation watch. After all, after the FOMC meeting two Wednesdays back the Fed is still technically in official tightening mode as it said the risks for inflation outweighed the risk of economic slowdown. Ironic, isn’t it? As we have chronicled for the past few months, the economy is slowing and now the evidence of that slowdown is clearly in view. Inflation lags the economic cycle, and even so the data shows it peaked this cycle in October. Thus even as the economy clearly slows and inflation has peaked the Fed is officially more concerned about inflation than an ongoing slowdown. Any wonder the Fed typically gets its economy management drills wrong?
There was some seemingly enlightened commentary from Fed governor Poole Friday when he said while inflation was still too high he was still of the mind he could cut rates as soon as it showed signs of slowing. “If inflation pressures are easing, even if only gradually, and there is a genuine prospect that inflation will return to comfort zone, then I seen no reason to accelerate the decline in inflation by maintaining a restrictive policy . . .” That sounds promising, but that only confirms that the Fed is going to wait for a lagging indicator to show a change. The problem is, the wait until inflation is slowing means waiting until the economic downturn if well entrenched. The waiting only increases the rate of damage making the recovery longer and harder.
This is the scenario repeated again and again as the Fed waits until it sees inflation slow. In reality what it sees first is the economy shudder and stall out and then it cuts rates. That is what panicked the Fed into cutting rates on January 3, 2001. Its last rate hike of that campaign was a 50 BP gig in May 2000. The economy was already heading lower, and then it swan dived into an empty pool to end that year with GDP growth falling off a cliff. The Fed moved, but it was much too late. Bernanke has given hints he is looking more to cycles than inflation indications, and that is hopeful. The Fed-speak, however, is the same old same old, and that is why the bond market has lingering doubts about the future and thus the modestly inverted yield curve.
As we noted Wednesday and Thursday, the markets appear to already be pointing toward a recovering economy, but the bond market is holding back with a modest inversion (Friday the curve closed at 4.69% versus 4.63% after closing at 4.67% and 4.62% Thursday) as the Fed remains on inflation watch. As discussed above, the ramifications of that historically are bad for the economy and thus the financial markets.
Chicago PMI posts a solid gain, once more putting the Philly Fed in its place.
The Midwest jumped back above 60 in terms of manufacturing (62.1 and above 50 is expansion), improving on the August 57.1 reading that was no slouch itself. That put the report back to its highest reading since same time last year as new orders surged to 67.3 and production jumped to 67.4. Prices paid fell to a 12 month low; at 69.8 they are still high but declining steadily, helped immensely but the fall in energy prices. Prices peaked in June at 89.0; the big drop occurred from July to August (86.8 to 75.2). That is a nice trend lower.
The Chicago report tends to foreshadow the national picture, and we will know Monday as the ISM is released. The national typically lags the regional reports by a month, however, so there likely won’t be any 60+ reading Monday (57.1 prior), particularly given the anemia in Philadelphia.
Trucking companies load factors indicate further slowing.
Friday morning Swift Transportation (SWFT) announced its Q3 would be lower due to a “significantly weaker freight environment” as well as a driver shortage. Trucking is key in the US. Trains move many containers but trucks get the goods to the final destination. When they start to show slowing, that is a very real, real time indicator of economic slowing.
Does it go beyond SWFT? Sure does. Trucking is in a peak season right now as retailers start stocking their shelves for the holiday season. As of yet, however, the industry is not seeing its usual seasonal bounce. Schneider is a private trucking company, but it is bigger than JBHT or SWFT. SWFT also noted the lack of seasonal increase, noting the volume increase “associated with peak season has been slow to develop.”
It is not all necessarily bad news. Schneider notes that the peak season has moved later and later in the year over the past decade as retailers use better inventory management and customer forecasting methods to stock their shelves with the right merchandise and at later dates given consumers have moved their purchases later and later in the season (the ‘last minute clearance’ mentality). We are hearing that retailers are ready to start boosting their inventory ‘sometime’ in October, and some are waiting until November. Not all of course; look around at the number of Christmas areas in stores already popping up.
Nonetheless, truckers are saying if the boost does not occur by mid-October, that is cause for concern. First, it likely means retailers are not going to order as much merchandise in anticipation of a slower holiday season due to lower housing prices. Lower gasoline costs will help, but no one really knows what the net result will be. We do note that over the past 5 years holiday sales forecasts have been too conservative. Second, if retailers wait too long and order at once, their inventory management strategy may be sound as far as carrying the merchandise on their books, but they may find it difficult to get all of the merchandise as the truckers say there won’t be enough capacity to handle a surge over a short period of time.
It remains to be seen how this plays out: lack of demand or just playing the waiting game. We seriously doubt the entire lack of surge in demand is due to retailers simply holding off purchasing until later. There is economic slowing just as anticipated, and retailers are gun-shy about loading up too much until they see if more traffic comes in.
Bulls: Bulls held steady at 47.4%, the second week at that level. That stalled, for the moment, a steady climb from 42.1%. 55% is 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: Bears held steady as well at 33.7%, down from 35.4% before that, 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: -11.59 points (-0.51%) to close at 2258.43 Volume: 1.909B (-0.21%). Volume remained above average but edged lower for the second session as NASDAQ slowed Thursday and sold Friday. Good to see volume back off as the move slowed and gave up some ground after two strong surges midweek. So far price/volume action continues to exhibit good action even as techs lag some.
Up Volume: 641M (-392M) Down Volume: 1.129B (+424M)
A/D and Hi/Lo: Decliners led 1.44 to 1. At least there were modest declines to match the mediocre advances on the upside sessions. The A/D line on NASDAQ is deteriorating as well as the move continues. Even in the techs investors are narrowing their focus to the larger caps, though it is not nearly as apparent as it is on the NYSE. Previous Session: Advancers led 1.1 to 1
New Highs: 99 (-10) New Lows: 46 (-6)
The Chart: (Click to view the chart)
NASDAQ started off the 18 day EMA (2228) Monday with a strong shot of volume as NASDAQ rebounded from the selling that marked the end of the prior week. Another test, another rebound as NASDAQ has put together a 250 point move off the July low. As with the rest of the market, NASDAQ has made four bounces off support on the move, and that makes it extended. Along the way it made a couple of higher highs over the June and July peaks on the ride lower, and it cleared the 200 day SMA (2222) and held it on a test on that most recent pullback. Friday techs ran out of gas and sold back modestly. A nice slow test back to the June high (2234) or the 200 day would set it up better for another move higher in its base.
SOX (-1.18%) was a disappointment for the week. It had put in a good test of its prior move well ahead of the rest of the market, holding some resistance at 450. It showed some fits and sputters during the week, but it could not make the break higher. Instead it moved laterally in a pretty narrow range over the 18 day EMA (454). It fell back to that support Friday. All in all, it is still in a nice consolidation and still in position to move higher. Still has resistance at 475 and the 200 day SMA (479). Of course, it has to make the break higher to even make the attempt. Thus far all we have done is wait.
SP500/NYSE
Stats: -3.3 points (-0.25%) to close at 1335.85 NYSE Volume: 1.473B (-1%). Another session of below average volume as the NYSE move ran out of steam after another good week, at least for the large caps. Low volume is what you want when a move starts to reverse. It is also what you want when it makes its pullback.
A/D and Hi/Lo: Decliners led 1.43 to 1. As with NASDAQ, rather modest. At least it is consistent. Previous Session: Advancers led 1.14 to 1
New Highs: 122 (-29) New Lows: 21 (-8)
The Chart: (Click to view the chart)
SP500 posted strong moves Monday and Tuesday as well as it bounced off the 18 day EMA (1321); sound familiar? The large caps were definitely in more demand last week as SP500 broke above its May high, making a new post-2002 high on the move. After the initial burst, however, it ran out of gas and spent Wednesday to Friday moving laterally. Trade backed off and it stalled. There was some portfolio buying to end the quarter, and it wound down at the end of the week. There was also more demand for large caps, however, just as there has been since the July low. SP500 has its new post-2002 high; NASDAQ still has miles to go before it makes that move. A test back to the May high (1327) would be a solid showing. That would likely be too pat. Even the 18 day EMA (1321) is too easy. A longer test to the April highs at 1311 might be enough pain.
SP600 (-1.01%) was of course under fire as the small caps were are on the top of the list of stocks on the bubble. The move took the index back below the 200 day SMA (373) down to close at the 18 day EMA. Nothing unusual in recent history, but it cannot break clear of this 380 range just below the July high (378). As noted last week, just because the small caps lag does not mean the expansion is over. It can just mean it is more mature. What you don’t want to see, however, is a breakdown in the basing attempt. How it responds on this test will tell more.
DJ30
DJ30 never made the new closing high after bouncing over that level a couple of times intraday. Volume trailed off as the week ended; when the Dow could not hold the move mid-week the sex appeal was gone. CNBC’s Dow Watch Wednesday was the apex. Thursday and Friday had some spiffy phrase re the record, but they escape me. See? Lost its mojo. Friday it made one more reach and the new record was in its grasp - - until it sold again. As with the other indices it closed negative and on lower, below average volume. Ready for another test, its fifth on this move off the July low. It is too close to the May high (11,642 closing) to use as support. It is somewhat in no-index’ land, a victim of its own success to this point as well as its lack of success in taking out the old high. Now it is extended, needs a test, and there is no great support level. 11,500 looks like something to shoot for, maybe 11,400. This one we just have to see how the post-portfolio shuffling impacts it.
Stats: -39.38 points (-0.34%) to close at 11679.07 Volume: 216M shares Friday versus 236M shares Thursday.
The Chart: (Click to view the chart)
MONDAY
The national ISM kicks off a week of economic data that culminates in the once ever so important jobs report. Now jobs may indeed be important once more just as they were (kind of) after the recovery that started in late 2002 and 2003 was underway. Jobs lag the economy. If jobs start to deteriorate anytime soon and hold a trend of deterioration, then we are in it pretty deep. Inflation lags the economic cycle, but job loss lags it even more. If we get to that stage the patient starts to become inoperable.
So, we look for a solid ISM and we also look for the stock market to test at some point after the new money and anti-window dressing moves run their course. In addition we continue watching what that bond yield inversion does. It was at 6BP to close the week after narrowing from 10 to 5. Bernanke speaks on Monday and then vice chairman Kohn on Wednesday. Will the big boys of the Fed take a stance differing from the company line since the pause (inflation is Armageddon) and do some good? That would likely cure the inversion as bonds wait for the Fed to bring down the artificially high Fed funds rate.
In short, we are saying that part of the bond curve’s problem is artificial. Of course that says nothing new; the bond curve’s problems are usually artificial in the sense they are induced by Fed action. In this case the inversion is to some extent fear that the Fed will go too far as well as other more traditional reasons of money coming back to US treasuries now that the emerging markets and commodities speculation faded and worries about overseas economies’ staying power arise. If the Fed gets off its inflation fear kick before much longer it can recover. Again, we look to see if Bernanke drops the company line.
Okay, back to reality. September was the month the market was to show change after the late summer rally. The only change, however, was that it did not do what it often does in September, even an early month correction. It was down two days and then jumped right back up, making basically the same test it has made all along in this rally.
Now the question is whether it carries on with a modest test or something bigger. The best move would be a dip, but as noted earlier, it may not get a chance to start the next week. The market is tired but it did not fade during the window dressing week. There is also more upside impetus from new money for a new month and quarter as well as money moving out of some of the window dressing stocks and into other stocks with potential for upside in the new quarter. Some money will stay with the winners, some money will move to others. Rotation is a good thing. It would be better if the market had something of a pullback to make for some more interesting entry points.
It may get that chance after some initial shuffling this week. In a national election year often the market will dip at some point in the first half of October and then rally on up through the election and basically to the year end. Pretty rosy scenario, but the market has been performing well with some good leadership. Given the market has made four tests of the move off the July low, when it does correct the move will likely be deeper. As noted last week, the market likes to pull back enough to generate enough pain and fear to clear out some easy sellers so it can advance anew. After this kind of steady run something deeper it going to come, but as noted, it can be delayed given intervening forces such as a new quarter and that associated buying.
Ultimately, we can anticipate moves, but the market action is where we take our cues. The market needs a pullback and it is likely going to get it based on its action to end the week and the run to this point, but it might only be after the new money is put to work to start October. That won’t be a bad thing either way. We can take some gain on positions that run higher the early quarter allocation of funds in preparation of the test, and then we get the test there will be solid stocks ready for the buying.
Support and Resistance
NASDAQ: Closed at 2258.43 Resistance: 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: 2250 is the March 2006 closing low. 2234 is the June 2006 peak (intraday) The 200 day SMA at 2222 2216 is the August 2004/April 2005 up trendline 2190 is the July 2006 high 2185 to 2182 is the September 2005 peak and interim high from November 2005. The 50 day EMA at 2183 2177 is the December 2004 high. 2168 is the August intraday high. 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 1335.85 Resistance: 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: 1334 is an October 1999 peak 1326.70 is the May 2006 high 1324 to 1329 from the October 2000 lows. The 10 day EMA at 1328 and the 18 day EMA at 1321 1311 is the April closing high. 1302 the recent August highs The 50 day EMA at 1302 1294 is the January 2006 high and 1297.57 is the February 2006 high. The early June high at 1288 The late January peak at 1285 The 200 day EMA at 1283 1280.37 is the recent July peak.
Dow: Closed at 11,679.07 Resistance: 11,723 is the January 2000 closing high 11,750.28 is the all-time high
Support: 11,670 is the May intraday high 11,642 is the May 2006 closing high The 10 day EMA at 11,617 The 18 day EMA at 11,556 11,488 is the early September high. 11,401 from the September 2000 peak and April 2001 highs The 50 day EMA at 11,391 11,384 is the August intraday high. 11,350 from the May 2001 peak The March 2006 highs at 11,329 to 11,335 11,279 is the late May closing high 11,243 is the early August peak closing high. 11,228 is the July closing high. The 200 day SMA at 11,136 11,097 to 11,137 is the last peak from the February top.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
October 2 - ISM Index, September (10:00): 53.5 expected, 54.5 prior - Construction spending, August (10:00): -0.3% expected, -1.2% prior
October 4 - ISM services, September (10:00): 56.0 expected, 57.0 prior - Factory orders, August (10:00): 0.0% expected, -0.6% prior - Crude oil inventories (10:30)
Market Data 
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