- The news was good enough to close out the week with gain. - Bernanke speech shows his eye is on the ball, but does he need some glasses? - Inflation as measured by the PCE continues its positive trend. - The game starts anew this week with higher volume and a load of economic data.
Stocks start strong and hold it to the close.
Bernanke was still warming up in the bullpen when the latest round of inflation data was released, the July PCE. It posted a second consecutive month at 1.9% year/year, within the Fed's comfort zone. Incomes came in at 0.5%, topping the 0.3% expected and pushing the year/year gains to 6.6%. That is not the crappy growth rate we are supposedly suffering through according to those on the campaign trail. Of course truth is typically the casualty of politics. In any event, even with Bernanke still to come investors appeared quite chipper as futures jumped sharply on the data.
There was another goose to the pre-market trade as the President's office announced President Bush would present a proposal to help alleviate some of the mortgage issues. The prospect of the executive office working in conjunction with the Fed had investors almost downright giddy. Futures were up in the 20 point range on NASDAQ and SP.
Of course, there is always the issue of whether a very strong open can hold, particularly when the market is still in a choppy mode, still trying to find its footing, and a major address by the Fed chairman is still to come. Indeed, stocks started to test immediately after the strong open. They were still positive but off their highs when the Bernanke text was released. The immediate reaction was lower, but it was not a dive downside, and after the market got over the fact that Bernanke was not ready to cut on Tuesday it rebounded. Didn't hurt that Chicago PMI was 53.8, topping expectations of 53.0.
The issue was still being decided when the President took to the microphone and put forth some of his ideas. He expressly said no bailout was planned, but that there were some things that could be done to help those stretched thin get through the tougher times and remain in their homes. He wants to extend FHA protection to roughly 80K mortgages, provide temporary tax abatement on taxes due when you refinance at a lower home cost, and better enforce predatory lending laws. Nothing all that spectacular, just something to show he was not as aloof as his father and that the government was doing more than just relying on the Fed and its interest rate stick.
The combination appeared to work. The indices double bottomed and rallied into lunch. A midday pause and then they rallied higher into the close, tailing off modestly in the last 10 minutes. The result was a solid gain for the session, but even with that the market closed mixed for the week, having to make a good comeback from the early week selling to do so. The Friday surge maintained their attempts at setting up some upside patterns off the bottom of this selling bout. It was no affirmation of a bottom in place, but it certainly showed that the hedge funds were not in selling once more to end the month as we feared would occur. With the Fed announcing it was in the game and the administration now wanting to gain some points with an "I feel your pain approach," that kept the sellers at bay, at least to end the month.
Technically the action was solid intraday. It gapped, tested, held on, and then rallied in the afternoon to close near session highs. Once more breadth was strong; it was strong on all of the sessions that showed a trend the past week and Friday was no exception with a 5.8:1 reading on NYSE. Volume was mixed but again low; Friday it was NYSE's day to show better trade, but still it was well below average.
That low volume is just right for forming bases, and after that hard selling that drove the indices lower to end July and start August, the low trade is consistent with base building: hard selling to start, then calming down on the bottom of the pattern. There is the negative connotation as well, the high volume dump, low volume recovery; that often ends with more selling before it is resolved.
The Friday action also left the indices at some prior highs in August or other key resistance such as the 50 day EMA where they stalled before. The low volume on the recovery to these levels leaves the move open to selling when everyone gets back into the market after Labor Day. That is the official start of September, and that is typically a tough one for stocks. As discussed Thursday, in 2006 it was no issue at all; in 2004 and 2005, however, there was some sizeable downside as the market worked on a bottom. Hmmm, seems somewhat familiar. For certain the increase in volume will mean the moves made are more meaningful.
The positive through all of this is the continued solid performance of market leaders such as AAPL, GRMN, BCSI, ZUMZ, NVDA, SLB, DO, etc. They are up but they are not trading on anemic volume when they make their solid moves. That is the backbone or the foundation of this market, whichever analogy you prefer. If they continue to hold their ground in the weeks ahead, that is a solid positive for the market.
THE ECONOMY
Bernanke saying the right things.
The Fed chairman delivered what some styled the speech of his career. He did an admirable job of once again sticking to script and managing to please the market as well. As we felt he would, he reiterated the points in the Schumer letter, but there was more as well, an expression of a deeper understanding of the Fed's role.
Bernanke's speech can be broken down into four parts. First there was a discussion of the issues facing the market, a restatement of the Fed's recognition in its August discount rate cut that the danger to the economy held precedence over any inflation threat. Second, he reaffirmed the easing bias or at least the non-inflation bias. Third, he copied from the Schumer letter, saying the Fed stands ready to act if necessary. Fourth, the Fed stands ready to act, but he does not specify just how.
Some called it the Rorschach speech: you could see in it what you want. Indeed, when boiled down the 'action' part of the speech said that if the Fed felt it needed to act it would act. Now that is groundbreaking. In sum, just as the Schumer letter stated, the Fed stands ready to act if necessary.
There was a very important statement that showed the current Fed's views on when and why to cut rates. Bernanke stated it was not the Fed's job to rescue investors from poor investments. That has been the howl among many detractors with respect to any Fed action. He answered that with the most concise, salient response we have heard from a Fed member in decades:
"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."
"Well-functioning financial markets are essential for a prosperous economy. As the nation's central bank, the Federal Reserve seeks to promote general financial stability and to help to ensure that financial markets function in an orderly manner."
This is the kernel, the chewy nugget, the prize in the Cracker Jack box. The Fed is not there to rescue bad investments, but when those bad investments threaten the rest of the economy, it is the Fed's duty to step in and assure that the financial markets work as they should. Thank you. Clarity at last. Thus the Fed is watching how the financial markets are functioning. It saw they were showing signs of serious strain and stepped in with liquidity injections and then a discount rate cut. They were going to the heart of the matter, i.e. thawing the credit freeze with money, versus just cutting rates as a first step. Just as Bernanke cleaned up the Greenspan inflation hangover by lowering money supply that Greenspan allowed to expand even as he hiked rates, Bernanke is going to the heart of the credit problem by creating liquidity where there was none, thus allowing the financial markets to function and resolve the issues.
The irony of this is that many are hurling jibes at those of us who take the position the Fed should act, saying that we are crying for intervention when things go wrong while we say 'stay away' when things appear fine. That is a shallow view that misses the mark: when certain events disrupt the orderly function of markets the issues cannot be resolved on their own without threatening the broader economy. It is incumbent upon the Fed to grease the gears so the markets can trade and resolve the issues. That is all we want and that is what the Bernanke Fed is trying to accomplish versus slashing rates as the first visceral reaction to the credit issues. As somewhat of a proof as to the soundness of this plan, note how the markets calmed down once the Fed started injecting funds and then cut the discount rate. The bank to bank rates dropped and deals started to get done, i.e. loan packages started to change hands again. It is not fixed; a lot can still go wrong, but the Fed is doing its job by watching and stepping in as needed to help the markets function.
Inflation read gives Bernanke the room he needs.
The core PCE for July came in at 0.1%, down from a revised 0.2% reading in June, and matching the April and May reading. That kept the year/year core reading at 1.9% for the second month. Critics will quickly say it is just barely inside the Fed's 1% to 2% 'comfort zone,' implying it could take off higher next month if the Fed is not standing with its foot on the economy's throat.
But that view ignores what has transpired the past 23 months. Way back in early 2006 we wrote that it looked as if inflation pressures, not inflation, peaked in the fall 2005. The pressures were abating though actual inflation was still rising: squeeze a full tube and even after you let off it continues to squirt out until the pressure is worked off. Thus over the last 2 years inflation has peaked and then has started to fall. Once it started the fall, the drop from a 2.6% core reading less than a year back has been rather rapid. The trend is down; it is not about to ratchet back up out of control. This is the fallacy of putting so much faith in a number and not looking at trends and the underlying facts.
So what does this mean? It means inflation is not something the Fed should worry about, and this admission with the discount rate cut that it is no longer putting inflation first is a relief. We only hope it did not wait too long to make this change. Not from the inflation standpoint; we were not worried about that at all anymore. If you look at the past 6 months the annualized core PCE is 1.5%. For two years inflation pressures have fallen, and now inflation itself is falling MUCH FASTER. In another 6 months the annualized inflation rate will be at 1.5% or lower and the 6 month reading will likely be near 1%. Inflation? It doesn't just flair up in a month and thus run out of control. The pressures abated, it has started to trend lower, and it is starting to really fall over the past 6 months.
Put/Call Ratio (CBOE): 1.06; +0.13. Moved over 1.0 on an upside session. Some short covering taking place as the market rallied.
Bulls: 41.7%. A rebound in the market, a rebound in bullishness, up from 40.6%. Looks as if 40.6% is the low barring a plunge back down to test the prior August low. Wanted to see it crack into the thirties on this leg to really show some negativity. Still a good drop from 53.9% 6 weeks back. Hit 56.7% hit in June. The 55% level is considered bearish, and it topped that level on this last run. 60% in December 2006. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 37.4%. Held steady at this level for the second week after a strong run from 18% just 6 weeks back. This tops the June 2006 peak. For reference, 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).
NASDAQ
Stats: +31.06 points (+1.21%) to close at 2596.36 Volume: 1.569B (-15.16%). Volume fell to the lowest since Monday as NASDAQ gapped higher. Once more the volume belies any real strength.
Up Volume: 1.316B (+170.817M) Down Volume: 228.386M (-412.498M)
A/D and Hi/Lo: Advancers led 2.45 to 1. Another solid breadth showing. Breadth was strong the past week, up and down, based on which way the index moved. If the buyers were in that day they were all in. If the sellers were in, ditto. Previous Session: Decliners led 1.36 to 1
New Highs: 80 (+65) New Lows: 55 (+27)
NASDAQ CHART: Click to view the chart
Gapped higher through the 90 day SMA (2585) and the 50 day SMA (2569), managing to close just over the 50 day SMA after an intraday test. Held positive all session though the volume on the move undercut the appearance of strength. NASDAQ is still in its attempt at a reverse head and shoulders pattern with the shoulders using the 200 day SMA as support, It is now in the upper reached of the pattern, basically at the neckline at 2600. This is in the range of resistance we said NASDAQ would have to face with a near top at 2632. That makes this week with the volume returning key for NASDAQ.
SOX (+1.5%) is actually showing some life. After dogging it early in the week and falling to the closing low from three weeks back it found support and started higher. Friday it was up again, moving to the 50 day EMA on the high. Not great, but it has put in a double bottom and just cleared the 'hump' Friday. A move over 500 is the next key move.
SOX CHART: Click to view the chart
SP500/NYSE
Stats: +16.35 points (+1.12%) to close at 1473.99 NYSE Volume: 1.393B (+8.85%). It was NYSE's turn for some stronger volume, but while it topped the Wednesday and Thursday levels it was still well below average. In short, more of the same as we wait to see what kind of volume the new month brings.
Up Volume: 1.263B (+869.888M) Down Volume: 120.637M (-755.249M)
A/D and Hi/Lo: Advancers led 5.86 to 1. Impressive as it has been on any session that showed a trend. No volume allows one side to push the action to the exclusion of the other side. Previous Session: Decliners led 1.45 to 1
New Highs: 42 (+27) New Lows: 52 (+43)
SP500 CHART: Click to view the chart
Solid move by the large caps as they took back almost all of the early week selling. Still closed down for the week. Friday SP500 moved through the 50 day EMA (1476) on the high but closed just below that level. The high at 1481 right at the neckline in the 5 week reverse head and shoulders trying to form. On the high SP500 tapped the late June low. This starts the bottom of the next strong range of resistance from the May and June trading range.
SP600 (+1.28%) moved through the 200 day SMA after making a higher low in the Tuesday selloff/Wednesday rebound action. The real move here is over 421, just 3.5 points away.
SP600 CHART: Click to view the chart
DJ30
DJ30 made a higher low off its July 2006/March 2007 up trendline this week and rallied through the 50 day EMA (13,341) and up to the confluence of the 90 and 50 day SMA on the Friday high (13,429). Volume was higher, and while still below average it was decent. The move pushed DJ30 further into the June range but there is still resistance on up to 13,690 - 700. It is working on a bottom similar to the other indices, but it has a lot of resistance still ahead of it. Making progress but as with the other indices, the real game starts this week.
Stats: +119.01 points (+0.9%) to close at 13357.74 Volume: 235M shares Friday versus 192M shares Thursday. Volume definitely picked up on the blue chips last week but was still below average.
DJ30 CHART: Click to view the chart
THIS WEEK
The past week ended with a flurry of key events with the PCE falling, Bernanke's 'we stand ready' speech, the executive branch engaging (sort of), Dell's not so crappy earnings. The week also ended better than we thought as the indices managed to post solid gains to close the week versus just flat lining as on Thursday. Things don't slow down this week. The ISM, the Fed Beige Book, productivity, and the jobs report line up to provide the next gauge of the economy. A bit more current data as it is from August, but still lagging.
The economic data provides the background music, but the major action is going to be driven by the end of the end of summer light volume. Post Labor Day typically marks the return to business following summer vacation that sees fund managers tag teaming trips. Now they all come back and set about preparing for the end of the year that typically sees an advance . . . once you get through September. There is another issue right now, and that is the 10+% declines in the indices and their attempt to recover and set up some upside patterns to consummate the deal. Not bad action to end August, but the trade simply was not there. The market has rebounded to resistance and the return of volume will tell whether the rebound was in anticipation of a recovery and new breakout or a set up for another round of selling.
Either way we still anticipate the market finishing its bottom. As pointed out above, there are still many strong stocks that made great breaks higher last week on solid volume despite the market's lower trade, and others that are just starting to make their moves. If the market is showing leadership that is a sign of underlying strength despite the current volatility. Again, even if the market returns to test the August low, if it holds and rebounds, that is a confirmation that the economy is not heading into recession and the market has bottomed and is moving back up in anticipation of further economic gains. In short, a big week ahead.
Support and Resistance
NASDAQ: Closed at 2596.36 Resistance: 2601 is the mid-May intraday peak. 2634.60 is the June peak 2638 is the October/December trendline 2673 is the early July high 2677 is the November/December/February up trendline 2704 is the November/February up trendline 2725 is the July high 2778 from a July 1999 peak 2887 from a September 1999 peak 2920 from an October 1999 peak
Support: The 90 day SMA at 2585 The 50 day EMA at 2569 2531.42 is the February high (post-2002 high); 2525 intraday 2509 is the January 2007 high The 200 day SMA at 2509 2450 is some price support from November and December 2006 2406 is that old trendline from August 2004 to May 2005 2400 is price support 2386 is the August intraday low
S&P 500: Closed at 1473.99 Resistance: 1475 from peaks in December 1999 and January 2000 The 50 day EMA at 1477 1487 is the July 2006/March 2007 up trendline The 50 day SMA at 1488 1490.72 is the early June closing low 1534 is the early July high 1539 is the mid-June intraday high 1541 is the early June high. 1553 intraday high from March 2000 is the all-time index peak
Support: 1461.57 is the February 2007 high. The 200 day SMA at 1458 1440 is the mid-January high 1427 represents some interim peaks from December 2006 and the early August low 1406 - 1407 from March 2007 and November 2006 interim peaks 1389 from October 2006 interim peak 1375 - 70 from March 2007 low 1370 is the August intraday low
Dow: Closed at 13,357.74 Resistance: The 90 day SMA at 13,434 The mid-May peak at 13,556 The early July peak at 13,671 The mid-June high at 13,689 The early June high at 13,676 (closing), 13,692 (intraday) 13,715 is the November/February up trendline that marks the lower channel. 13,735 is the upper channel line in the November/February channel The July high at 14,022
Support: The 50 day EMA at 13,341 13,121 is minor support from the April peak 13,050 is the July 2006/March 2007 up trendline The 200 day SMA at 12,898 12,796 at the February 2007 high 12,518 is the August intraday low 12,500 is the December 2006 peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 4 - Construction spending, July (10:00): -0.1% expected, -0.3% prior - ISM Index, August (10:00): 53.0 expected, 53.8 prior
September 5 - Pending home sales, July (10:00): 5.0% prior - Crude oil inventories (10:30): -3.48M prior - Fed Beige Book (2:00)
September 6 - Initial jobless claims (8:30): 334K prior - Productivity revised, Q2 (8:30): 2.3% expected, 1.8% prior - ISM Services, August (10:00): 54.5 expected, 55.8 prior
September 7 - Non-farm payrolls, August (8:30): 120K expected, 92K prior - Unemployment rate, August (8:30): 4.6% expected, 4.6% prior - Hourly earnings, August (8:30): 0.3% expected, 0.3% prior - Average workweek, August (8:30): 33.8 expected, 33.8 prior - Wholesale inventories, July (10:00): 0.5% expected, 0.5% prior
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