Monday, September 18, 2006

After A Week of Gains


- CPI in line and stocks rally but come home mixed after a week of gains and a Fed meeting ahead.
- Core year/year CPI hits 10 year high, but indicators are still not showing inflation worries.
- September not looking like September for hurricanes or the market.
- Market needs a rest ahead of Wednesday FOMC meeting.

Stocks try to rally on the CPI but the afterburners can’t kick in.

Investors breathed a sigh of relief as the CPI came in as expected. Never mind the core year over year hit a 10.5 year high at 2.8%; the monthly figures were in line and some key components fell hard (e.g. gasoline), and will far even further in the next report. In line was just fine for an inflation weary market, particularly with oil still weak, gold going lower, and bonds still trending lower overall.

It was enough to jump stocks higher with NASDAQ gapping up at the open and all of the indices making a run at next resistance. After a week of gains, however, the stomp on the accelerator at the open emptied the tank. A quick test of the early move and stocks were back up at the session highs, but they could not carry it further. They then spent the rest of the day bouncing up and down but whittling away the morning gains all along. NASDAQ even turned negative and SP500 flat midday before an early afternoon bounce. The momentum could not sustain into the close, however, as stocks faded back in the last hour into the bell. Given the FOMC meeting on Wednesday and a week of gains already in the bank, it was hard to make much headway.

Technically the indices continued to lose some strength, unable to hold a morning advance on some decent news. NASDAQ cleared next resistance at the June high but fell back after bumping the bottom of the Q1 trading range. SP500 tapped the May high and retreated and DJ30 did the same. They managed to hold their gains but closed well off the highs. SOX rallied near its June high and then it too faded, and indeed turned negative at the close.

Volume surged but it was expiration as well as an S&P rebalance. Expiration and the run higher in September led to a lot of rollouts for those expecting a market drop. The rebalance resulted in a lot of jumps higher at the close and really pumped up volume. Thus no conclusions can be drawn from the spike in trade. Some leaders were moving, but breadth was just so-so, indicating that outside the leaders not much was able to advance or at least hold the early gain.

Basically another upside session, but relatively weaker than the prior moves. As noted Thursday, that is typical in a move: out of the gate gangbusters, then slowing as the advance matures. No big secret there. The leaders need some more rest as does the rest of the market. With a nice week of gains in the bank and the FOMC meeting next Wednesday, this is a perfect time for stocks to drift a bit and consolidate, with the leaders coming back to test near support. That sets up the next move higher. It is still September and you still have to be on guard for market upsets. It still looks like solid action, but getting past expiration and avoiding a sell off after tapping at next resistance in the form of the post-2002 highs is a key milestone. Thus far it is handling it well, but as we all know, the market is more interested in what will you do for me tomorrow as opposed to what did you do for me lately.


CPI rises in line with expectations but year/year hits a long-term high.

Overall consumer prices rose 0.2% as did the core, right in line with expectations, matching the June level but dropping from the four consecutive 0.3% gains before that. That buoyed spirits about lessening inflation, but the yearly figure rose to 2.8%, a level not seen since March 1996. That, of course is well over the reputed Fed’s ‘comfort zone’ of 1% to 2%, but Friday Kansas City Fed president Hoenig said the CPI “was good news for us” and that would keep the Fed from raising rates next Wednesday. Wow. Not really news to the financial markets the way they have traded, but speaking out less than a week ahead of an FOMC meeting is considered gauche in Fed circles.

On top of the in line inflation data and the Fed’s stamp of approval, many continue to call for slowing inflation based upon a slowing economy and moderation in energy costs. While we can agree with the latter, as you know we believe the former is garbage. Economic speed has little to do with inflation. It is how much money is in the system relative to the economic speed. The Fed has dried up much of the excess money flow that led to the early summer speculation, and perhaps that is why the Fed is making these statements. It is not, however, enlightening us as to the reason for the Fed’s calm. Apparently we have to take it on faith.

Friday also saw the consumer buck up a bit more with the revised Michigan sentiment report up to 84.4 versus 83.5 expected. Other private sentiment polls have shown solid rebounds in sentiment. No doubt a result of the 17% dive in oil prices and gasoline prices falling from $3/gallon to the 2.20’s and 2.30’s in many places. Of course the drop in oil is bringing out the calls that oil will fall into the 50’s and even the 40’s in the not too distant future. That feeds positive sentiment as well, helping fuel that change in inflation expectations we discussed last week.

Not all flowers and candy: ECRI leading indicator improving but not fast.

ECRI’s U.S. leading indicator rose to an 8-week high the past week, up 0.9. Its 4-week annualized growth rate moved up to -0.9%, its third straight weekly advance. Improving, but the overall level is the issue. It is still low enough to indicate some significant economic slowing, and ECRI says the numbers indicate not a choice between growth or economic slowing, but whether we have a soft landing (economic slowing) or a hard landing (recession).

Indeed, as if on cue industrial production shrank 0.1% after gaining 0.4% in July. Capacity fell to 82.4%, down from a 6 year high. Now that is hardly an indication of a major slowdown given the solid preceding numbers, but it continues the series of more volatile economic data that shows gains then declines, gains then declines, etc. When a trend starts turning volatile that is a sign of some change attempting to take root and you have to take note. We have seen the up and down data in other areas, and of course the all down readings in housing.

The market appears to be reading this as no real issue at the moment, given the rebounds in SP500 and DJ30 close to post-2002 highs and the renaissance of NASDAQ and SOX. Bond yields continue to move lower, and while that can be a very good thing for the economy and stocks, if it is forecasting a significant economic downturn or worse that is obviously a bad thing. The short term and long term rates continue their inversion (4.86% on the 2 year, 4.79% on the 10 year); the pesky inversion won’t give in even with indications things are setting up positively (continued solid PMI/ISM, lower gasoline prices, stock market comeback). That keeps us on edge as September progresses because if selling this time of year comes, it often shows up similar to a bullet traveling at high velocity.



VIX: 11.76; +0.21
VXN: 17.75; +0.26
VXO: 11.01; -0.51

Put/Call Ratio (CBOE): 0.82; -0.12

Bulls versus Bears:

Bulls: 45.8%. Up from 43.2% last week and 42.1% before. Steady climb this month toward the 55% level considered bearish. Still well below the peaks from January and April, and well below the 55% level considered bearish.

Bears: 35.4%. Bulls may be rising but so are the bears. As the market gets higher they are growling, coming back strong from a 33.7% the two prior weeks. This has reversed somewhat the steady 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).


Stats: +6.86 points (+0.31%) to close at 2235.59
Volume: 2.523B (+32.55%). Volume blasted off Friday, more so than many recent expirations. We would like to ascribe accumulation to that move but it was mostly technical given the strong move in NASDAQ

Up Volume: 1.343B (+298M)
Down Volume: 1.152B (+424M)

A/D and Hi/Lo: Advancers led 1.07 to 1. Very narrow move.
Previous Session: Decliners led 1.25 to 1

New Highs: 129 (+43)
New Lows: 42 (-7)

The Chart: (Click to view the chart)

NASDAQ gapped higher on the CPI news rallying to the bottom of the January through March 2006 trading range (2240 to 2315). It met a wall there, fading back intraday but managing to hold the break above the June high (2234) on the close. NASDAQ cleared the 200 day SMA (2223) during the week, and the run to the Friday intraday high capped a 100 point week. Not bad apples, basically matching the mid-August run, the second leg of the late summer rally. After this move NASDAQ is likely to come on back for a test of the move down toward the 200 day SMA and onto perhaps the old up trendline at 2205ish.

SOX (-0.04%) rallied well on the open, running up to tap at the June closing high (475) but then fading to close basically flat. That is a tombstone doji after the strong run to start the week, and that can indicate a pullback ahead. Of course, SOX has already started its test, working laterally since Wednesday. Still likely to come back a bit more, but the action in the index remains solid, and a test back toward the 10 day EMA (454) seems about right for this index.


Stats: +3.59 points (+0.27%) to close at 1319.87
NYSE Volume: 2.204B (+52.03%). The SP500 rebalance shot volume to the moon and thus it is hard to take anything from the volume for the session.

A/D and Hi/Lo: Advancers led 1.42 to 1. Mirrored Thursday’s downside breadth. In short it was rather weak as was the overall move for the day.
Previous Session: Decliners led 1.46 to 1

New Highs: 189 (+84)
New Lows: 31 (+1)

The Chart: (Click to view the chart)

SP500 surged up to the May high (1326.70) on the first hour run and then peeled back with the rest of the market, posting a gain but giving back just over half the move. Solid run to overcome the distribution last week and match that old high. Now it has to make the test of this move, put in a higher low (the 10 day EMA is at 1310) and then break through that old high. Always get a big edgy around these prior highs, particularly at this time of the year; that old bullet coming unexpectedly. A prior high is a natural spot to sell if that is the inclination. Overall the move is showing solid action, not suggesting any imminent selling, and we will wait for a nice, orderly test to complete and then look for leaders making their move back up.

SP600 (+0.33%) bounced up off the 200 day SMA (372.18) once more but closed off its high as well, finding some resistance at 375 again. A very nice string of higher lows and now a break over the 200 day SMA. A lateral move along this level for a few more sessions sets up the next break higher, and as noted before that move will be important for the rest of the market as it indicates the economic expansion still has life given the economic leadership this sector provides.


DJ30 flirted with its May high as well (11,670.19), hitting 11,614 on the high before peeling back for a modest gain to make it 5 upside sessions out of 6. Volume ballooned as well on expiration and the S&P rebalance, coming in well above average for the first time since the July expiration. DJ30 remains in solid technical position, but also in the same scenario as SP500 as it has bounced up to the pre-correction high and now has to make the test, hold, and then show the breakout. Many are talking of a new all-time high for the Dow (past 11,750.28) - - it was all the buzz Friday on the financial stations - - and that always makes the move more problematical.

Stats: +33.38 points (+0.29%) to close at 11560.77
Volume: 365M shares Friday versus 203M shares Thursday.

The Chart: (Click to view the chart)


It is Fed week, and the market has rallied in anticipation the Fed will once again hold pat on rates at 5.25% . . . along with oil dropping to $63/bbl. With NASDAQ putting in a 100 point gain and SP500 and DJ30 rallying to the May highs and fading back, the market is still in need of a rest after that nice run. If the market can put in a lateral move ahead of the FOMC meeting it may be able to generate an upside move on the news. Maybe. It definitely needs the rest and the FOMC news would be just about perfect timing to prod it along once more. The market has anticipated the move, however, so it may not provide much mileage. It could, however, provide a trigger to get things moving again after a needed technical rest.

Several things are coming together, helping the rise. The Fed less likely to hike rates again. Practically no storms this year versus last year’s wave upon wave of storms and damn dangerous ones as well. That has definitely influenced oil prices and thus the stock market. Here we are at the height of the storm season and the major ones are spinning off in the Atlantic out of harm’s, or at least shore’s, way. Here we are half way through September and the market is looking solid. Neither is looking like itself in September, and we are all glad for that.

All in all the past week was constructive with rising volume gains as the indices took out some resistance levels, continuing their work to complete bases (NASDAQ, SOX, SP600) or add to the breakouts (SP500, DJ30). Success, however, brings about inevitable pauses or short term selling, and that is what we are looking for this week. The FOMC meeting and the run to this point provide excellent reasons to take a breather and wait for the news. As noted, the news is pretty much factored in, but with a pause (pardon the pun) and slight fade to test ahead of the news it could provide a trigger to push things along once more. It would also give the leaders a chance to test back themselves and then continue their runs.

The good action has many calling for DJ30 12K as noted above as analysts follow the lead of the September hurricanes and veer off of the usual path. The Hurricane Center has changed its outlook, lowering its forecast for storms, and similarly the analysts have changed their outlooks, raising their forecasts for the market. A storm can come at any time, in nature or in the market. Getting a bit cocky as the rise in bullish investment advisors last week shows.

Thus we have to remain icy and pick our entry points and not get into the game of chasing the bus as stocks move higher. That is why we like what looks to be a pullback to test setting up. SOX is already working laterally, and if this market strength continues the semiconductors should be some of the early leaders again. We are going to have to let them finish setting up for the next move, however, and then start the bounce. That is when we move in. This is even more important here in September when selling can start rather quickly; thus what has been a routine pullback can get out of hand.

We like what we see as far as the overall upside move, but the time of year warrants keeping your buys tight and sticking with solid leaders. Thus this weekend we are looking more at stocks that are starting to pullback and will be in position to give us a likely entry point this coming week but likely a few sessions down the road. The market moves in waves with successive moves along the trend (up or down) with tests of the trend after each move. You can buy into the test on faith it is going to hold again, and if everything is solid it likely will. Given it is September, however, and given that there was a bit of distribution two weeks back before expiration week and its elevated trade levels, we want to see a successful test, i.e. one that comes back on low volume and then has leaders jumping higher on volume. That is when we know the big money is moving back in and we want to come to the table with them.

Support and Resistance

NASDAQ: Closed at 2235.59
2234 is the June 2006 peak (intraday): broke it and testing it in the same session.
2250 is the March 2006 closing low.
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

The 200 day SMA at 2223
2206 is the August 2004/April 2005 up trendline
The 10 day EMA at 2201
2190 is the July 2006 high
2185 to 2182 is the September 2005 peak and interim high from November 2005.
The 18 day EMA at 2182
2177 is the December 2004 high.
2168 is the August intraday high.
2158 from the May 2005 low.
The 50 day EMA at 2151
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 1319.87
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak

1315 is the May and May 2001 peaks
1311 is the April closing high.
The 10 day EMA at 1310
The 18 day EMA at 1304
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 50 day EMA at 1289
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 200 day EMA at 1279
1265 is an old trendline from the August 2003/August 2004/October 2005 lows.

Dow: Closed at 11,560.77
11,642 is the May 2006 closing high
11,670 is the May intraday high
11,750.28 is the all-time high

The 10 day EMA at 11,466
The 18 day EMA at 11,413
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 50 day EMA at 11,281
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,096

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.

September 18
- Current Account, Q2 (8:30): -213.5B expected, -$208.7B prior
- Net Foreign Purchases, July (9:00): $75.1B prior

September 19
- PPI, August (8:30): 0.3% expected, 0.1% prior
- Core PPI, August (8:30): 0.2% expected, -0.3% prior
- Housing starts, August (8:30): 1.77M expected, 1.795M prior
- Building permits, August (8:30): 1.75M expected, 1.763M prior

September 20
- Crude oil inventories (10:30)
- FOMC policy statement (2:15): No change expected from 5.25% Fed Funds Rate

September 21
- Initial jobless claims (8:30): 308K prior
- Leading Economic Indicators, August (10:00): -0.2% expected, -0.1% prior
- Philly Fed, September (12:00): 14.0 expected, 18.5 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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