Thursday, October 12, 2006

Tired market can't get past FOMC minutes, Cory Lidle plane crash

- Tired market can't get past FOMC minutes, small plane crash.
- FOMC minutes hark back to impatient Feds of old.
- Bond market a bit early on the rate cut rally.
- After trying to spark a rally Wednesday, chips are going to be a drag on lowered outlook

Market won't rise, won't sell.

Earnings had the market in a poor mood pre-market. Alcoa missed, Monsanto had some weak guidance, and DNA's strong report was questioned on some drug sales levels. North Korea was threatening another nuke test as well. With the FOMC minutes coming out in the afternoon, investors were not in the mood early on.

SOX, however, was trying to stir the pot. It was up early and jumped to a 2% gain, pulling NASDAQ along with it. SP500 and DJ30 struggled to advance, but moved higher as well. At 1:00ET, however, they peaked when the Fed's Lacker reiterated his Greenspan-like 'kill inflation at any cost' stance; Lacker wants to see inflation trending lower before the Fed stops hiking rates. That is very much Greenspan-like, but unfortunately it is the exact mindset that leads the Fed to overshoot 13 out of 15 times and send the economy into a tailspin.

On top of that the FOMC minutes came out and the theme was an inflation lament with some members trying out martyrdom with comments about the Fed losing its credibility if it didn't hike while inflation was outside the Fed's comfort range. That tossed cold water on the markets, equity and debt. Bonds sold, stocks sold. The market is tired of the Fed beating a dead horse; commodities have peaked, energy has peaked, accurate leading indicators show inflation has peaked. It is amazing how the Fed gets stuck in a perceptions game ('oh, the markets may think we are pussies if we don't hike rates until the economy stalls') versus doing its job.

In any event, stocks took an immediate hit, but they were on the comeback when a small airplane crashed into the twentieth floor of an apartment tower on 72nd street in NYC. The initial fear in NYC is always terrorism, and that pushed stocks lower. It became apparent fairly quickly, however, that it was a terrible accident as opposed to anything nefarious. The market rebounded, but the extra kick down on the plane crash news kept the indices from turning positive by the close. SOX was the holdout, but from the looks of some strong after hours earnings yet weak guidance from LRCX, it won't be the holdout on Thursday, at least to the upside.

Technically it was another nonevent for the most part. DJ30 and SP500 continued their lateral moves, refusing to give back any gains, tapping the 10 day EMA on the low and rebounding. NASDAQ showed a bit of the same action, once more stalling near 2320 on the high. Volume was up on both indices, a significant jump on NASDAQ. That shows a bit of churn after breaking higher last week and bumps against the top of the Q1 range. Some of that volume was attributable to the semiconductors taking the lead, but that cannot account for the entire increase. That is a bit of a concern, but overall the action remains solid. A bit overextended, but solid. It remains to be seen if the weak guidance by LRCX that sank the chip equipment makers late in the after hours session (after an early surge higher) will prove to be the final straw that sends some tired indices lower.


FOMC minutes reflect recent hawkish Fed speeches.

Bernanke is the moderate, at least what we see in public. The September FOMC minutes did not reflect his rather sanguine commentary earlier this week, instead addressing what we heard from his underlings all week regarding inflation being too high and the Fed ready to hike if necessary. All in all it was a hawkish statement, at least for financial markets tired of having the Fed run roughshod over them for two years.

The Fed focused on two primary areas: housing and, of course, inflation. The Fed remains concerned that the housing slowdown will have deleterious effects on the economy, but it noted that the housing slide was not having spillover effects on the rest of the economy. It appears that though the Fed is concerned about housing, the fact that inflation is not dropping as quickly as some want appears to be trying many FOMC members' patience.

The Fed spent a lot of time on inflation, never a good signal. While prices had moderated since the spring, thanks mainly to energy, the Fed still saw inflation (based on its indicators) running beyond the Fed's stated comfort zone. That is a problem because in stating a level it wants inflation it has boxed itself in. Several members worried that the Fed would lose credibility if it did not attack inflation while it was above its target level. That is very bad news. When the Fed starts worrying about how it is perceived in doing its job as opposed to actually doing its job, it tends to make grievous errors. It starts casting one eye on the mirror instead of having both eyes on the ball. It tends to miss obvious signs of problems when it just focuses on inflation and its perception. We have said it before, the market doesn't care how stately the Fed looks; it cares about the results. Thus the financial markets responded favorably when the Fed paused despite perceived higher inflation. It was the right thing to do.

In an ironic twist for those complaining about the job market, the Fed noted labor shortages pushing up wages. Geez. The economy was trying desperately to generate some jobs all during the expansion according to many pundits, and with job creation at 130K per month it hardly seems to be draining the workforce. Could it be the Fed is looking at the unemployment rate, i.e. the household survey that it discredited during the Greenspan years? Talk about losing credibility. You find yourself saying 'there they go again' as they switch positions based on what they want to say. Jobless claims near 300K were bane to the Greenspan Fed but were no big deal in this recovery. All of the sudden we get labor shortages out of modest monthly jobs growth? As with the Greenspan, this Fed now appears to be looking for excuses. Again, that is a bad sign and rather idiotic for a Fed saying it is concerned about its credibility. How Greenspan-like. How disconcerting.

Looking at the whole release you get the feeling the thing keeping the Fed at bay was declining energy costs. Prices overall had declined but not as fast as they wanted. If oil had not tanked along with gasoline they might have raised, at least based on what was in the minutes. We don't know what exactly Bernanke is saying or not saying. The talk certainly reminded us of the Greenspan days when the Fed would get impatient and not let its policy decisions work, or at least not give them time to work before moving again. This is a common theme in Fed action, and what often leads to the overreaching that many Fed members were concerned about in late 2005 and early 2006.

It is in rather sharp contrast to Bernanke's public appearances, his stated monetary policy theories, and indeed the comments made by Poole this week about following the financial markets. Perhaps the Fed is trying to maintain its ability to pause even as inflation remains above the comfort level. Talk a tough game and try to stick to the plan. The Fed is assuming that people will think it is a slacker if it is not tough. Why not voice the plans, i.e. say that forward inflation gauges show inflation peaked and they are just letting things work through the system? That is what the Fed is doing with this pause, but with the PCE and CPI rising, it fears it will be viewed as weak. It apparently does not want to abandon the PCE and CPI as their main indicators, at least publicly.

Bond market retrenches some on FOMC minutes hawkish tone.

The bond market sold on the news as interest rates jumped (4.85% 2 year versus 4.78% 10 year) and the inversion widened to 7 points. Modest still, but also close to becoming the entrenched inversion where size does not matter (where have we heard that before?).

The hawkish tone forced the bond market to retrace some of its rate cut gains. Some of the Fed-speak turned a bit mellow this week (Yellen, Bernanke), so the hawkish minutes tone might be overdone a bit, but the bond market still gave back gains when the report issued.

The bond market did get ahead of the Fed based on history. After the Fed pauses it takes on average 7 months to start cutting rates. It paused in August, so that would make it early 2007 (February) before the Fed would cut. In 2000 the Fed hiked last in May and then cut rates at the start of January 2001; seven months. This is the 'usual' case because the Fed goes too far with its cuts as it tries to get inflation to fall faster as Lacker wants and others echoed in the FOMC minutes. It is absurd to think that rate cuts in August would get inflation to fall faster in October, but that simply underscores the usual Fed SOP, i.e. where it gets impatient and loses sight of history and its game plan. It continues to hike and typically increases the intensity. By that time, however, it is way too late to stop the slowdown. Thus Lacker, new to the Fed, is showing he is an amateur because he wants to see inflation falling before stopping hiking. Again, that would ensure a major economic slowdown. Just open the history books and check it out. When you are finished, highlight it and send it to the FOMC members.



VIX: 11.62; +0.1
VXN: 18.51; -0.35
VXO: 11.08; +0.22

Put/Call Ratio (CBOE): 0.92; +0.09

Bulls versus Bears:

Bulls: 49.5%. Big jump from 47.4% where it paused for 2 weeks. Up from 42.1% and drawing closer to the 55% level 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: 33.3%. Down from 33.7% where they held for 2 weeks as well. Down from 35.4% before that, but still well above the 20% level considered bearish. The 37.1% hit in July 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: -7.16 points (-0.31%) to close at 2308.27
Volume: 2.042B (+14.31%). Volume moved up sharply, rising above average once again after a low volume ascent by the index following last Wednesdays breakout. Not a great power move higher. Then a big doji Wednesday on sharply higher volume. Definitely some churn as NASDAQ bumps at the top of the Q1 range. Going to keep a close watch on this as the move progresses.

Up Volume: 840.059M (-79.291M)
Down Volume: 1.063B (+322.859M)

A/D and Hi/Lo: Decliners led 1.47 to 1
Previous Session: Advancers led 1.1 to 1

New Highs: 64 (-25)
New Lows: 19 (+3)

The Chart:^ixic.html

NASDAQ rallied toward the top of its Q1 range once more (2333, 2322 on the Wednesday high), but again it faded back. It was positive with a solid move higher up to the Lacker comments and then ran into the Fed and airplane trouble. The higher volume and doji on the candlestick chart indicate some higher volume turnover; investors were passing the stocks around in a game of hot potato. No crash yet, but worth watching. The breakout was strong and the chips will be strong again Thursday. We would like to see them spark a rally and continue NASDAQ's breakout move, this time showing some power similar to that on the breakout move.

SOX (+1.29%) put on a good performance though it closed well off its high, giving back half of its gains on the session. It has made a strong move one session each week the past month but has been unable to follow it up with another move. It looked as if it would put it together early after the close with the earnings out from LRCX igniting the chip equipment sector. Then LRCX said some quite negative things about the future of chip equipment such as flat orders for 'several quarters', and that stuck a pin in the move and likely any second day of a chip rally.


Stats: -3.47 points (-0.26%) to close at 1349.95
NYSE Volume: 1.591B (+5.98%). Volume moved up to average as well on the NYSE as it bumped into the recent resistance, tested, and rebounded. A bit of churn here as with NASDAQ.

Up Volume: 663.541M (-249.342M)
Down Volume: 909.513M (+372.153M)

A/D and Hi/Lo: Decliners led 1.46 to 1. Middle of the road but stronger than the price declines indicate.
Previous Session: Advancers led 1.21 to 1

New Highs: 106 (-4)
New Lows: 5 (+3)

The Chart:^gspc.html

SP500 tried 1355ish once more and could not punch through, the same level it has bumped the past 5 sessions. Wednesday it tapped the 10 day EMA (1345) on the low and rebounded for a modest loss. The rising, above average volume indicates some churn setting in here as it tries to work higher but struggles. That shows shares changing hands faster, and that indicates the move is starting to get a bit winded as the buyers cannot push stocks higher and the higher volume allows the early money to exit while some late comers spend. It is still tired and in the fourth bounce after the breakout, so the easier move is lower for it from here to test again.

SP600 (-0.39%) gave back some ground but held up well, tapping the 10 day EMA (376.73) on the low and snapping back. It is holding above the September highs and is still solid in its base. Likely won't see much impact form the SOX as it continues to work on the base. That remains a solid underpinning for the economy as long as it continues building the pattern.


Strikingly similar to SP500, DJ30 completed its fifth lateral session, holding a tight range as it refuses to give up its gains. That is a sign of strength in most cases, and there is no reason to doubt that here other than the move is getting long in the tooth. There was some churn here as well as volume moved up above average as it tapped the 10 day EMA (11,794) on the low and the rebounded to cut the losses. It still needs a test, but it certainly has not shown anything to suggest investors are selling out of the index.

Stats: -15.04 points (-0.13%) to close at 11852.13
Volume: 256M shares Wednesday versus 227M shares Tuesday. As with NYSE and NASDAQ, some churn as DJ30 works laterally after the strong run.

The chart:^dji.html


Stocks weathered the Fed once more as well as a plane crash in NYC, and the key areas of NASDAQ and SOX looked ready to lead in the early after hours results. The gains posted on the big results dissipated and turned to losses in the chip equipment makers when the guidance came out. Chips were set up well to rally and looking for a trigger. Instead they are getting a bullet, at least as far as the chip equipment makers are concerned. It is hard to overlook them and write it off as sector specific. Other chip areas were not under heavy fire after hours, but for a sector looking for a trigger, this was an anchor.

We will have to see how the guidance impacts the rest of tech and semiconductors, but we are not expecting it to provide any boost. It is another issue the market has to deal with as the NYSE indices try to rest after strong moves while NASDAQ and SOX try to makes some strong moves themselves. Looks as if the money won't be rotating their way Thursday.

This may be the lead-in to the October dip we have written about; it is certainly not a reason to run out and buy in technology, but we will have to see what spin the market puts on the news. It is hard to see it as a positive at this juncture. Again, with SP500 and DJ30 in their fourth bounce post-breakout, they are ready for a test to set up a move to the end of the year. There was some churn Wednesday, and we will have to watch volume Thursday to see if it runs higher again. It was pretty strong Wednesday, and higher trade would certainly indicate conviction in the direction the market takes.

Support and Resistance

NASDAQ: Closed at 2308.27
2316 from interim tops in January and March 2006 trading range
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2376 is the April high, the post-2002 high

The 10 day EMA at 2288
2273 is the recent September peak
The 10 day EMA at 2267
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2224
2222 is the August 2004/April 2005 up trendline
The 50 day EMA at 2213
2190 is the July 2006 high
2185 to 2182 is the September 2005 peak and interim high from November 2005.
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

S&P 500: Closed at 1349.95
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

The 10 day EMA at 1345
1339 is the late September closing high
The 18 day EMA at 1337
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
The 50 day EMA at 1314
1311 is the April closing high.
1302 the recent August highs
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 1286
1280.37 is the recent July peak.

Dow: Closed at 11,852.13
Has broken free and now we just look at how far above its 50 and 200 day SMA it gets to gauge how overbought it is. It is 6.2% above the 200 day SMA so it has some room before it gets to the 10% level where it typically will start to falter.

The 10 day EMA at 11,794
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
The 18 day EMA at 11,718
11,670 is the May intraday high
11,642 is the May 2006 closing high
The 50 day EMA at 11,510
11,488 is the early September high.
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
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 11,174

Economic Calendar

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

October 10
Wholesale inventories, August (10:00): 1.1% actual versus 0.6% expected, 0.9% prior

October 11
FOMC minutes, September 20 (2:00): Worried about looking like girly men as inflation is above their comfort zone as measured by CPI and PCE yet they are pausing.

October 12
Initial jobless claims (8:30): 312K expected, 302K prior
Trade balance, August (8:30): -$66.5B expected, -$68.0B prior
Crude oil inventories (10:30): +3.35M prior
Fed Beige Book (2:00)

October 13
Retail sales, September (8:30): 0.2% expected, 0.2% prior
Retail sales ex-autos (8:30): 0.0% expected, 0.2% prior
Michigan sentiment, Oct. Prelim (9:45): 86.5 expected, 85.4 prior
Business inventories, August (10:00): 0.5% expected, 0.6% prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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1 comment: said...

Our prayers and deepest heartfelt condolences go out to the family and friends of Cory Lidle.


Eric Aafedt