- Stocks rise early, rise late, close higher yet again. - Bonds continue to do the Fed’s work for it as they price in some inflation worries. - Jobs report and revisions shows continued growth. - Riding the low volume ripple up toward the February highs and earnings.
Sellers nowhere to be found as market melts higher, caps upside week.
For a schedule light of economic data, there certainly was a plethora of information to wade through in the pre-market. Jobless claims rose to 321K, almost smack on target (320K) and though up, at a level indicating a sustainable jobs market. Indeed, the Monster.com jobs report jumped to a record level. The Bank of England left interest rates steady. China raised bank reserve requirements (for the sixth time since June 2006). Norfolk Southern railroads announced rail rates were lower and carload volumes were lower as well. Talk about a mixed bag. How would the market sort it out?
From the look of it, it ignored it all. They sized up the news and opened flat to lower. Once again, however, they started a slow, steady rise. Indeed, the price action resembled that seen in a strong bullish run higher: steady moves up, tests back to the 15 minute moving average, then another steady move higher. We anticipated some selling attempts to stall the move out heading into the long weekend and ahead of the Friday jobs report, but sellers didn’t want any of that. Sure there were a couple of tries to take it lower, one right before lunch and then again in the last hour, but the market shook it off.
Ever since the two sharper down sessions two weeks back the sellers have left the building. Upside volume has not really surged (though it was fairly solid on NASDAQ Tuesday), but with the sellers AWOL, stocks could drift higher toward the prior highs. Enough so that NASDAQ and DJ30 put together a string of 6 straight upside sessions.
Technically the action showed decent price gains once more with leadership from technology (mainly large cap), some energy, metals, chemicals - - much of the same crowd crowding the leader board of late. Tuesday renewed the follow through and breakout off the early March double bottom, and Thursday and Friday kept the move alive. There was no volume as expected, and breadth remained modest. No surprises there. It was the lack of interested sellers versus a run of new buyers that is keeping this slow rise toward the February highs on track.
Some volume would be nice after the holiday to take on the prior high. If it does not get it, the ability to take out that high and continue on is low, likely leading to a test of the prior low, and that means another decline. For now we ride the move higher for what it will give us, then size up the next move when the indices start approaching those highs and exhibit signs of balking such as slowing moves and narrowing ranges, stocks leading higher starting to distribute, sharp intraday reversals. Those are classic signs when an old high is approached and a stock or index is preparing to give back some of the run.
THE ECONOMY
Bond yields rising again, helping the Fed in a tough spot.
We have written about the lingering inflation that is dogging the economy thanks to interest rates held too low for too long and an initial stimulus package that only fanned demand during the economic slowdown when demand had held up quite well. Of course, the levels of inflation as measured by the Fed and its PCE and CPI are debatable; is 2% the limit the economy can withstand? Highly doubtful. It is a level the Fed has chosen, however, so that the Fed can foist upon us the policies and thus the control as it is directed by the powers that be such as administrations and the ultra rich.
That heightened inflation reading, however, is something we have to deal with because the Fed is using it as its monetary policy guide. Thus the rate hikes started by Greenspan and continued for a time by Bernanke. An interesting thing happened along the way to fixing inflation, however. The bond yield curve inverted during Greenspan’s tenure. A flat curve (short term bond yields roughly equal to long term) historically suggests slowing to flat economic growth. An inverted curve (short term yields above long term yields) historically suggests recession.
There was a twist, however, due to an unquantifiable bid in US treasuries due to the ‘recycling’ of US dollars back to the US as part of our large trade imbalance. One of the chief sources of dollars for treasuries is OPEC as those ‘petro-dollars’ are turned back to the US in exchange for US treasuries which are, basically, IOU’s to pay at some point. This large amount of dollars due to the price hike in oil buy treasuries, and as bonds are purchased and ‘rally,’ bond rates are pushed lower. The rub as Shakespeare put it, is no one, not even Greenspan, knows how much of an impact there is on treasuries.
What is more interesting is how the yield curve has responded to the Fed’s actions as the economic expansion aged. As the Fed remained hell bent on stamping out inflation and talked tough about doing so, the yield curve inverted and remained inverted. As Bernanke took over and talked to Congress early on in his tenure, he got a bit too lax with respect to inflation, indicating it was possible the Fed could up and pause. The curve flattened and even reverted for a brief point; then the Fed came out with fire and brimstone, basically saying Bernanke spoke too loosely and was not being literal. The curve inverted again. Then when the Fed paused the curve reverted again. Once more, tough talk ensued and the inversion returned. After that first rebound following the ‘pause’ comment we opined that the market was telling us that if the Fed would lay off the curve would revert. That suggested that the market viewed the Fed’s action as overreaching, i.e. likely to lead to a recession in the future.
Now with the last statement where the Fed dropped the ‘further tightening’ language the curve has reverted and is holding it (4.62% versus 4.68% Thursday). That suggests that despite the inflation, the market views the Fed backing off as helping preserve the expansion. Rates rise when there is economic expansion. The Thursday close put the 10 year back at the February highs. Thus the yield curve has reverted and higher rates show demand for money down the road. Higher rates are also doing the Fed’s job for it if you view monetary policy only through the prism of rate hikes. Bernanke has shown us it is much more what with his rather sage management of money supply that Greenspan kept at a high growth rate thus fueling the inflation he was hiking rates to combat. Nonetheless, if it is rates you are worried about with respect to the Fed, the ‘natural’ rise in rates of late means the Fed is very much out of the rate hike game for now.
Jobs rebound, unemployment fades to cycle low, wages continue modest rise.
Jobs blew past expectations, coming in at 180K versus 135K expected. January and February were revised 16K higher each, bringing the 3-month average up to 152K. The unemployment rate, the so-called household survey, fell to 4.4%, matching the cycle low hit in October. Wages rose 0.3%, in line with expectations and roughly matching the range shown the past quarter. Wages grew at a 4.0% rate year/year. At this stage of the cycle they are showing the gains typically associated with an expansion. In other words, despite what many like to say, wage growth is following the typical path: it lags the overall economic recovery, gaining strength well after the recovery is underway and employment heads toward capacity.
That brings up two important points regarding the employment data. First, it is lagging. As noted, wages start to log their best gains well after the expansion is underway. Thus while it is nice to see strong employment, it does not answer the question of where the economy stands with respect to the future. It is similar to beating a weak team at the first of the season; it is nice, it is expected, but it does not tell you much about the strength of your team. Thus the economy could be slowing even as the jobs report strengthens. Indeed that is what we are seeing, but as we have said many times, this is not a serious economic slowdown, just a mid-cycle economic slowing.
Second, the payroll numbers are not as accurate as the household survey depending upon what type of recession and recovery you have. We all remember Greenspan opining to Congress that the payroll report was the most accurate, and thus the moniker ‘jobless recovery’ attached to this expansion. As history has shown, Greenspan was wrong on many occasions, and this is just another one in the list. The household survey or unemployment reading, however, showed consistently strong jobs growth. When people were asked if they had a job, more and more were saying ‘yes,’ much more so than the payroll figures reflected.
What happened was big business stopped investing and spent three years cutting its workforce sharply. With no jobs coming from the ‘traditional’ means, those ex-employees had to find means to make money. Thus the explosion in Subchapter S and limited liability corporations as thousands and thousands of new businesses were born. The government data did not reflect this because it was looking in the wrong places. Not until two years after the surge was this known by the government because it takes that long for the feds to acquire and analyze the data from tax returns and other filings.
Thus this recovery was much stronger than first thought. In addition, the wages are much better than thought as well. Again, the government figures focus on the non-farm payrolls for their wage data, but with big companies, the ‘traditional’ hirers for many workers, laying off workers and increasing productivity, wages did not grow. The government cannot accurately measure self-employed workers wage growth, however, so it has no real idea whether wages are growing for all of the new businesses spawned by the tech boom to bust plunge. It has thus grossly misjudged the strength of the US worker/entrepreneur.
The empirical evidence shows it did just that. The housing boom attests to the incomes and optimistic views of US citizens. Spending and consumption boomed. Business investment boomed as those hundreds of thousands of new businesses bought capital equipment, aided by the much more generous expensing options contained in the Bush tax cuts. If wages are low and the outlook for jobs and income are poor, consumers don’t spend. The data rebut that emphatically.
In sum, the jobs data is closely watched and is great political fodder. It does not tell you about the current economic strength, however, nor does it even accurately measure jobs in the modern economy. Futures were up on Friday after the jobs report. Whether they can hold over to Monday remains to be seen, but it is rather false optimism; things were good enough to hire more workers, but as we know, CEO confidence also lags the economic cycle, missing the tops and the bottoms.
Bulls: 50.6%. Big jump in bulls from 48.4%, continuing the rise from 46.6% and 45.5% before that. It has returned to the 50.5% level high a couple of months back though below 53.3% on the recent high. Bulls bottomed last summer it was near 36%. That is the lowest level since September 2006. Still a ways to go, but when it cracks it can tumble quickly. A 4.3 point drop is pretty salty.
Bears: 25.8%. Substantial drop from 27.5%, continuing the slide from 28.4% and 28.9% immediately before that. This bounce in the correction continues heartening investors and thus reducing bears. That strong jump higher from 26.9% and 24.2% last month is eroding but still well above the 20% where it held to start the year. It hit a post-2002 high in that late June 2006 move (hit near 36%), 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). It is not far from those 2005 levels.
NASDAQ
Stats: +12.65 points (+0.51%) to close at 2471.34 Volume: 1.601B (-12.38%). Volume faded further below average Thursday as the 3-day weekend was met early by many investors running out of town. Lower volume both Wednesday and Thursday, but a solid volume jump Tuesday as NASDAQ broke higher was a good confirmation of the follow through.
Up Volume: 1.161B (+178M) Down Volume: 418M (-65M)
A/D and Hi/Lo: Advancers led 1.27 to 1. Breadth remained weak-kneed through Friday after sporting some solid 2:1 on the Tuesday move upside. Previous Session: Decliners led 1.14 to 1
NASDAQ made it six in a row and the latter three moves were better than the first. Of course those were the sessions NASDAQ was shaking off the selling and rebounding off a test of 2400. The Wednesday and Thursday move took NASDAQ above the late March high (2456), and that was a confirmation of the follow through on NASDAQ two weeks back. Next resistance is near 2500 ahead of the February high at 2532. A drift higher toward 2500ish looks to be in the cards right now.
SOX (+0.55%) continued its bounce off the test of 460, moving into the upper half of its 5 month trading range. Hardly a surge, just a steady recover from the last dump lower. The move is seeing some upgrades along the way (chip equipment was upgraded Wednesday), and that added some strength to the upside. All in all, however, SOX remains well entrenched in its 5 month base, and those in position to buy are rather few in number.
SP500/NYSE
Stats: +4.39 points (+0.3%) to close at 1443.76 NYSE Volume: 1.247B (-10.97%). Volume has lagged the entire move, being below average since mid-March when the index sold sharply lower then reversed intraday. Low volume moves are prone to fail, and thus we are going to watch SP500 in particular when it approaches its prior highs.
Up Volume: 820.899M (+67.061M) Down Volume: 406.5M (-216.372M)
A/D and Hi/Lo: Advancers led 1.58 to 1. Solid as both large and smaller caps enjoyed roughly equal gains on the Thursday session. Previous Session: Advancers led 1.13 to 1
SP500 extended its move off the 50 day EMA with a bit better price gain than on Wednesday. With this move it made a more definitive price move above the late March high (1439). As noted above, volume was anemic once more. Without a lot of sponsorship an index will struggle as it approaches a prior peak. For now we let it make the rise and watch how it performs at some resistance at 1450 before trying on the February high at 1462.
SP600 (+0.24%) added more upside as it put in a good week as well. Unlike the other indices, SP600 never gave up near support, bouncing off the 18 day EMA as it formed a nice handle to its 6 week double bottom base. Same base the other indices formed, just that SP600 is in a much better position to rally given it formed an excellent base from May 2006 to January 2007 before breaking out and then forming this short base. Nice base on base pattern that can really set up some powerful upside moves.
DJ30
Same story as the other indices. It stretched its break over the March ‘hump’ at 12,500 and is now carving into some overhead supply from January and February. Again, not a lot of strength showing up on this move higher to probe at the February high (12,796), but it is showing the same time momentum the other indices possess.
Stats: +30.15 points (+0.24%) to close at 12560.2 Volume: 165M shares Thursday versus 210M shares Wednesday.
Stocks are moving higher overall and there is some solid leadership moving it higher as seen in our plays on the report from energy to metals to chemicals, not to forget some tech, medical, and good old business services. Strength is spread out rather broadly, but there are concentrations such as energy for example.
Despite the leadership, the market is still finding it difficult to attract a lot of strong trade as it makes the move, and again, therein lies another rub. The indices are moving higher but there are not an overwhelming number of buyers pushing. There was volume on the follow through session on NASDAQ and again this past Tuesday as the indices came off the test of that follow through. Outside of that, trade is light. Stocks are not riding a wave of strong buying; more like a ripple that is slowly pushing them higher. It would not take much selling to upset the rise.
That said, the sellers left town the past week, not willing to get in front of this rally at this point. They are likely to stay more or less out of the way until the indices start homing in on the prior highs. Unless trade picks up at that point it is going to be hard to punch on through. At a minimum the sellers will test the water and try to push things back.
After the Friday jobs report futures posted some solid gains as the futures market investors viewed the data as bullish economically regardless of what the Fed might or might not do in response. Sometimes the market is pretty sage and thus far Bernanke has looked pretty sage in his moves. We are pretty confident he knows employment is lagging and acts accordingly (that is not always the case with Fed chairmen; they may know but they don’t act as if they do). Thus we don’t see the jobs data in any way impacting the Fed’s decision on rates. If anything, Bernanke is relieved to see it because it will help bolster the consumer at a time when economic data is decidedly mixed.
Thus as it looks as if stocks will continue to try the drift higher toward the February peak we will take on positions in good upside ready stocks as the move continues, but we will also be ready to take more gain off the table and protect positions as the indices move up toward those levels, particularly if they start bucking a bit with more volatile trade and struggling leadership. Stocks have risen ahead of earnings, and combined with the low volume and the time of the year (on the cusp of the summer doldrums), a bit of caution at the prior highs is warranted. There will be sectors that continue to perform such as energy and likely metals and materials even if the selling renews, but it behooves us to recognize those old highs could be more of a stumbling block than many are giving them credit, particularly with earnings and the summer ahead.
Support and Resistance
NASDAQ: Closed at 2471.34 Resistance: 2471 is the December 2006 high The July/August trendline at 2476 2509 is the January 2007 high 2520 is the December/January up trendline 2523 is price resistance November 2000 2531 is the February high (post-2002 high)
Support: 2468.42 is the November 2006 high 2460 is the March high The 50 day SMA at 2440 The 50 day EMA at 2431 2405 is the ‘hump’ high 2400ish from the late November and late December 2006 lows. 2379 is the October high. 2376 is the April high, the former post-2002 high. 2368 is the early October handle high. 2340 is the March low 2339 – 2334 2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs) 2316 from interim tops in January and March 2006 trading range
S&P 500: Closed at 1443.76 Resistance: 1440 is the mid-January high 1444 from February 2000 1461.57 is the February 2007 high. 1467 is the late November to February up trendline 1475 from peaks in December 1999 and January 2000
Support: 1439 is the March high 1432 is the December 2006 high The 50 day SMA at 1425 1425 is an interim high from November 1999 The 50 day EMA at 1421 1410 is the ‘hump’ high 1408 is the November high 1389 is the October peak. 1374 is the early March low 1371 to 1373 is the December 2000 peak and the January 2001 peak 1369 from early October 2006 1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
Dow: Closed at 12,560.20 Resistance: 12,623 is the mid-January high 12,700 is the early February peak intraday high 12,796 is the February 2007 and all-time high
Support: 12,511 is the March intraday high. 12,499 is the December intraday high. The 50 day SMA at 12,451 The 90 day MA at 12,430 The 50 day EMA at 12,398 12,361 is the November 2006 high 12,350 is the March ‘hump’ high 12,039 is the early March low. October high is 12,167 11,986 is price support from mid-October and the early November low. 11,940 is the March low 11,865 from the early October consolidation
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.
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