- Market limps into weekend, trying to hang on to try a further bounce this week. - Mixed CPI, strong inventories and production stoke further inflation fears. - Market set up for bounce, but patterns less than inspiring. - Subscriber Questions.
Another uninspired session to end a tough week.
Stocks needed to hang on for another session to make it to next week with the Wednesday reversal in tact and thus give the market a chance for a follow through session to set up a rally. The indexes undercut the March lows last week and reversed twice off of those lows on strong volume. The key was the SP500 holding its 200 day SMA, and that brought buyers back in both times. The action set NASDAQ, SP500 and DJ30 up for a double bottom, but now comes the hard part, delivering to the upside in the face of resistance and a long list of ailments troubling investors.
Friday the market got off to a rocky start with futures very low. The economic data came out pre-market and was mostly solid, the futures recovered, and the market opened lower but was not tanking. Then the preliminary Michigan sentiment survey was released, and the 200 respondents were not less despondent but didn�t provide the gain anticipated. This preliminary report is a joke, requiring significant upward revision in the final number for the past six months, yet the market acted as if the end had come, dropping sharply in 20 minutes.
Just when it looked as if the selling was again going to take stocks down for the third time a slow, gradual rebound emerged. Unspectacular, but steady. In the last hour, however, it lost what little strength it had. Semiconductors were strong early but they too fizzled. Techs and chips ended down the most on the session. They did not give back the rebound, but they were far from strong. At least volume was lower, indicating no renewed dumping, just nervous selling.
THE ECONOMY: fears coming full circle
The market is dogged by the same fears and uncertainties: Iraq and the handover, terrorism, inflation, Fed rate hiking campaign, election, oil prices, the economy�s ability to continue solid growth. You can tell the worries are getting close to irrational as investors and pundits thrash about with as many different reasons as there are stocks. Friday was a case in point.
Business inventories rose a solid 0.7% when just 0.4% was expected. For months economists had talked of an inventory buildup needed to satisfy demand and to indicate that a strong recovery was underway. We noted it was further needed because the stock to sales ratio was at a record low and any disruption would wreak economic havoc. So, the rise in inventories should be a very good economic indication. Well, Friday the word we were hearing on the bond trading floor and even the equity floors was that maybe business was not that good after all as inventories were rising. That was the worry in the recession: companies left with too much inventory when the economy slowed down. Right now there is robust order growth, and indeed, business sales jumped 2.9%, easily outstripping the inventory build. That, however, was overlooked.
Consider Cisco�s earnings. It noted inventories rose 20% in the quarter. CEO Chambers was very clear that the inventory build was based on a strong jump in new orders. Chambers also stated that US demand was really jumping and that Cisco had underestimated the recovery. Yet, analysts were heard worrying that Cisco would have another huge inventory write-down in the event of another tech wreck. Yes, and a foot of snow could accumulate in Houston this winter; possible, but extremely remote outside a return of some form of an ice age.
Thus there are still those lingering worries from the last recession, but at the same time the traders, analysts and pundits are worrying that the economy is too strong. It started with the retail sales that followed the March employment report. When that came in hot investors smacked their foreheads as they realized that yes, the economy had really improved. It took the lagging indicator of jobs to drive home the point, but when it did they realized the Fed was not fooling and that it was going to raise rates. That sparked the opposite fears of inflation, the Fed overreacting once again and choking off the economy as it has so deftly done in other expansion, snatching defeat from the jaws of victory.
That is just part of what investors are dealing with: a serious internal conflict as to what the numbers mean. Indeed, it is a conflict as basic as whether the numbers mean the economy is strong or is heading into another disaster. Specifically, there is little doubt the economy is strong, but with talk of declining earnings and the potential for a Fed induced slowdown or recession, fears from the last nasty recession and the still bloody wounds from that plunge give investors pause no matter how strong the economy appears.
CPI posts another rise though mixed.
Of course, there are also inflation worries. The April CPI rose 0.2%, better than the 0.3% expected. Not bad. The core jumped 0.3%, however, indicating that food and energy fell in price. Actually, energy was shown to be flat because of adjustments made in anticipation of normal price rises at this time of the year. The problem is, energy really jumped since, and the May CPI could really be an eye opener.
As it is prices rose 2.3% year over year, and up 1.8% year over year on the core. Now these rises are not that huge. There were some 0.2% gains not too long ago that were heralded as quite positive. The problem is the trend, and it is clearly heading higher. January year over year gained 1.2%, February, 1.3%, March 1.6%; the trend is up though not at high historical rates of growth. It is enough to spark further fears of inflation and fear of the Fed.
Don�t assume energy prices will be passed on.
Once again, however, it is important not to assume that prices will be passed on. That was the assumption in 1984 and again in 1994, but it never happened. Rising energy prices never made it through to the consumer despite assurances they would and Fed rate hiking sprees.
This always brings up the chicken or the egg debate. Do rising energy prices cause inflation or are they a symptom of growth? The Fed always uses energy prices as a reason to threaten raising rates. In our world, however, energy prices are not totally driven by demand. A cartel sets production at a level it feels is best. It tries not to cut production too much so that high prices choke off world economies, but it does play a big role in setting world oil prices. Late in the Clinton administration we went from being awash in oil one month to critical shortages the next with supposed lack of refining capacity to boot. After some posturing for a few months with the US saying OPEC should act and OPEC saying it was due to forces out of its hands, prices finally subsided.
Demand plays its role as well. China has increased its consumption dramatically in its expansion, and as the rest of the world recovers they use more energy as well. Now it is not as it used to be. Since the 1970�s the US has become much more energy efficient despite the charges that we are energy gluttons. Today we get more GDP value per BTU than ever before, and thus $41/bbl oil is not as heavy a drain as first imagined. Indeed, in today�s dollars oil in the 1970�s was $78/bbl, almost twice what it is today.
The bigger question is when will prices subside. We anticipate we have seen most of the rise on this run. A high of $44 to $45 will most likely cap the move. Indeed, Saudi Arabia is already taking the point in saying production should be raised, but that jawboning had no impact on the market. That will only work to make Saudi more adamant to raise production as it has had something of an identity crisis of late and still wants to show that it has the ability to directly influence world oil markets.
THE MARKET
The market ended the week doing what it had to do, namely avoiding another sell off. The two tests of the March lows and SP500 200 day SMA set the stage for a double bottom. The two rebounds indicate that buyers stand at the ready. The question is whether the concerns confronting investors will be resolved at this juncture and pave the way for a rally from here and a completion of the double bottom. The market always anticipates events, and once it has a sense of certainty it will make its move.
Thus the market sets at the threshold of a rebound and we look for a follow through session this week, Monday through Thursday. That would be a strong price gain on rising, above average volume and solid breadth. That sets the stage for a further rally, and of course, it presupposes investors get comfortable with the outcome of the current events. As we noted last week, rallies are often born in the midst of what seem to be the worst of times, and Wednesday things were pretty ugly before the reversal.
The market starts the week with the indexes holding most the Wednesday rebound though NASDAQ and SOX were backpedaling to end Friday. Again, the indexes are set to form a double bottom if so inclined, but the close Friday left them meekly showing dojis below near resistance. There will have to be a surge of buying to rectify these pretty weak looking finishes to the week.
Indeed, when you look at the groups that are performing the best, you don�t see the typical sectors that support growth spurts. One of the best is the food group. Not that they are dog meat so to speak, but when you are looking at a market for growth prospects, food in general is not a booming category. There are always hot stocks due to some new diet or some shortage, but overall it is not a group to lead. Defense is also a stronger sector, also not a traditional growth leader. Another strong general sector is medical (drugs, appliances, healthcare), areas you traditionally consider defensive though there are undoubtedly growth stocks within these groups. There are individual strong patterns across the market, but as groups the leadership is not the type you traditionally see when the market is putting together big gains. Big techs and chips look weak and some downright in trouble. There are a lot more stocks trending lower or in at best ambiguous patterns as opposed to nearing a breakout.
Thus, even with the indexes in position for a double bottom rebound, the majority of stocks are not in position to break to new highs. As noted, many are still ambiguous and appear to have quite a bit more work to do before they are ready.
Put/Call Ratio (CBOE): 0.97; -0.04. High finishes the past two weeks as funds hedged to the downside and speculators bet on the downside.
NASDAQ
Sluggish all session, made a decent comeback, but then gave in late. It was not a small loss, but it held 1900 and remained very low.
Stats: -21.78 points (-1.13%) to close at 1904.25 Volume: 1.532B (-1.72%). Volume was lower on the selling, well below average. At least there was no dumping of shares on a very heavy session.
Up Volume: 286M (-513M) Down Volume: 1.225B (+479M)
A/D and Hi/Lo: Decliners led 1.87 to 1. Modest decliners as NASDAQ was hurt by big names such as DELL and CSCO. Previous Session: Decliners led 1.3 to 1
New Highs: 31 (+7) New Lows: 76 (+28)
The Chart: (Click to view the chart)
Judging by the patterns of DELL, CSCO, AMAT and other large cap techs, NASDAQ is in no condition to rally. AMAT rolled back over after its weeklong rebound from the recent lows. Volume rose as it turned over. Same with CSCO; DELL gapped below the 50 day EMA and had to fight to hold the simple 50 day. Again, with this kind of action from major movers of the index, NASDAQ is lucky it did not sell harder. It has held some support at 1900 after reversing twice off of 1878, and as are the other indexes, in position to bounce and form the right leg of its attempted double bottom. The stage is set: the pattern, the gloom at the low last week, sentiment indicators. Until the move occurs, however, it is just a possibility.
S&P 500/NYSE
The key to the market�s survival last week, the large caps held steady once more on very low, below average volume. Set to bounce the best of the large indexes.
Stats: -0.74 points (-0.07%) to close at 1095.7 NYSE Volume: 1.336B (-5.13%). A dustbowl of trading activity Friday, exactly what it needed after the two violent reversal sessions earlier in the week.
Up Volume: 624M (-34M) Down Volume: 694M (-45M)
A/D and Hi/Lo: Advancers led 1.3 to 1 Previous Session: Decliners led 1.13 to 1
New Highs: 16 (0) New Lows: 97 (-54)
The Chart: (Click to view the chart)
A second consecutive tight doji below the 10 day EMA (1103) but over the 200 day SMA (1079) that set off two reversal rallies during the week. More than the other major indexes, SP500 is best situated to make the rebound move to form the double bottom. Fitting in that it is the index that keyed the reversals that kept the market from rolling over. It is hard for it to make a lot of headway without NASDAQ, and NASDAQ without SOX, but it looks as if it will have to be the one to do it. Strong volume on a move through 1110 (the 18 day EMA) would be a good start.
DJ30
Struggles still at the 200 day SMA (10,021), moving laterally after the big reversal Wednesday that had the true look of an intraday key reversal. Similar to the SP500, it closed out the week holding onto that reversal on low, below average volume. It is holding near the 200 day and the psychological 10,000 level as it too tries to hold here and set the bottom on the right leg of a double bottom pattern spanning February to the present. Time to fish or cut bait this week with a follow through session.
Stats: +2.13 points (+0.02%) to close at 10012.87 Volume: 175 million Friday versus 216 million Thursday.
The Chart: (Click to view the chart)
THIS WEEK
Earnings are pretty much played out and the economic data is light with some regional manufacturing reports and the leading economic indicators being the important points. The LEI is key as there is this pervasive fear that the economy will not be able to maintain the gains, and that was going around even before the Fed changed its view. The Fed may indeed put the kibosh on the expansion, but thus far it continues to surpass all expectations.
The market managed to rescue itself last week, but it was not a clean reversal. It took two tries, and though the rebound Wednesday was very nice, it is still not a lock it recovers. It has held key support and reversed on volume amide a lot of pessimism. That has more than a few pundits we saw on the financial stations saying this week was the bottom or at least saying there is a rally from here even if it turns over and falls again a bit further into the summer. Again, it is set up to rebound and shows the attributes of a rebound. Indeed it ended the week in decent fashion, resting after the big reversal, holding the move, and setting up for a follow through this week. Quite a few quality stocks made solid moves Thursday and Friday, though quite a few more did not have the volume backing them. Leaders move ahead of the market, so this is a good indication stocks will try to make more of the reversal midweek.
As usual we will let the market tell us what to do and we will take what the market gives. Lately it has been holding its moves in check, not letting anything run a long way. We see stocks in certain sectors in continuing downtrends and showing no signs of reversing the trend. At the same time we see other stocks in excellent upside patterns, several starting to move at the end of the week. In this environment we want the upside plays not only to look good but to deliver excellent moves at the critical time in order to earn our money. We shorten our profit goals and then let the stocks and the market prove to us if there is more there.
We are going to continue to look at upside and downside positions both because the market has not yet decided on its path and also because there are stocks clearly in downtrends that look to continue those trends regardless of a bounce just as there are upside plays that are ready to rally with the market if it can muster the break higher.
Support and Resistance
NASDAQ: Closed at 1904.25 - Resistance: The 200 day MA (1944). The 18 day EMA (1950). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1982) and 50 day EMA (1982). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high. - Support: Mixed tops and bottoms at 1900. The April lows (1880, 1878). 1850 below that.
S&P 500: Closed at 1095.70 - Resistance: 1096 to 1100. The 10 day EMA (1103) and 1106 is a May 2002 top and represents some early 2001 lows. The 18 day EMA (1110) and 1114, the weekly up trendline from the early 2003 lows. 1125 stalled the last bounce attempt. The exponential 50 day MA (1120) and the simple 50 day MA (1122). The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002. - Support: April lows (1079, 1076). The 200 day SMA (1079). 1075 to 1070 from the December consolidation.
Dow: Closed at 10,012.87 - Resistance: The 10 day EMA (10,115). The 18 day EMA (10,192) and 10,250. The exponential 50 day MA (10,299) and simple 50 day MA (10,303). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high. - Support: 10,000 and the 200 day SMA (10,021). 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.
5-17-04 - NY Empire State Index, May (8:30): 34.8 expected, 36.1 April
5-18-04 - Housing starts, April (8:30): 1.98M expected, 2.007M March. - Permits, April, (8:30): 1.94M expected, 1.976M March.
5-20-04 - Initial jobless claims (8:30): 330K expected, 331K prior. - Leading economic indicators, April (10:00): 0.2% expected, 0.3% March. - Philly Fed Index, May (12:00): 31.2 expected, 32.5 April
SUBSCRIBER QUESTIONS
Q: Having learned a lot over the last few years, I am now trying to find a good way to watch the volume and volume levels of the market in general. For example, [Tuesday] was a good move on poor volume. But I don't know where to best find and watch "market" or "index" volumes. What do you watch during the day to keep up with current volume levels for "the market"?
A: We pay for real time services that provide the data, but there are free, web-based volume sources. One of the easiest to use is on the Yahoo!Finance site. It is updated every two minutes or so and is pretty close to real time.
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