Sunday, July 08, 2007

Market fends off higher oil and interest rate roller coaster

- Market fends off higher oil and interest rate roller coaster, closes a positive week positive.
- What a surprise: jobs top expectations, following the economy back up.
- Economy is improving, so are earnings expectations again too low?
- This current rebound looks a lot like March.

NASDAQ still on the point as market closes out an upside holiday week with more gains.

Despite strong manufacturing and service reports, despite solid personal spending and income, despite lower inflation, the jobs report remains a market focus, at least so it seems. Jobs, however, are nothing, nothing, without the rest of the economy on an expansion. Thus as the non-farm payrolls came in a bit above expectations while May and April were revised higher, all the report showed was that jobs skated over the second half 2006/Q1 2007 slowdown without missing a step. In other words, there was no panic from businesses as they continued to hire right on through the slow patch (to borrow a Greenspan-ism).

Jobs ARE important at this stage, not because they are a leading indicator, but because they keep the consumer consuming even in a down housing market. More on this later, but suffice it to say that jobs were good enough to confirm to those that view jobs as some sort of leading indicator that the economy is good enough.

The fact that housing was strong and supposedly confirmed what the leading indicators were telling us rattled the market at first. Futures fell while bond yields leapt back up. After a 5% handle early in the week they closed out the day at 5.18%, that after bouncing off 5.20% early in the session. Stronger economy means less chance of a Fed rate cut (gee, who would have thought?) and thus the rise in bond rates. The pendulum has swung back, and now it is right back at the other end of the 10 year's trading range.

Even with the bond issues and oil finishing the week over $72/bbl ($72.65, +0.84), stocks managed to rally and close positive, closing out a week of upside gains. Leadership continued to emerge as tech broke to a new post-2002 closing high Tuesday and kept on climbing to the close. Friday saw a return of some of the early leaders such as energy and metals as well, and of course the Chinese net stocks were surging once more with CTRP and BIDU still surging higher.

The Friday move capped a week of gains that started with the new quarter. Many solid stocks gapped higher to start the week and continued rising right on through the Friday close. The week saw NASDAQ move further into the lead when the market needed it to, spelling the NYSE large cap indices and showing the market has some healthy attributes outside of the old yet new economy industrials as money rotated to a new area. There were some volume movers and we bought into some and we took some gain as well.

The snag of course was the lack of volume on the move. Overall trade was holiday light for the entire week. Hard to complain about it with NASDAQ finally moving to the lead. Many times the market moves as a precursor to better news or times ahead. Hence the rally that started last August even as the economy slipped into a mid-cycle slowdown. NASDAQ did assume the leadership role and as is often the case, it is pulling the other indices with it even as they consolidate their strong gains as they led the market higher. The roles are reversed right now; not too far back NASDAQ was simply tagging along, following the large cap NYSE stocks higher.

Of course the light trade still begs the question whether the move will hold next week when the big money managers return and earnings reports start up. Some upside volume would help after these low volume gains. Prior to that, however, we anticipate a pullback to test the move, kind of some cold feet ahead of the earnings season.


Non-Farm payrolls top expectations at 132K, show no slowdown the business side . . . and no inflation.

Non-farm payrolls topped expectations by 7K, but part of the real punch to the report was the upside revision of April and May that added another 75K jobs to the prior totals. Hourly wages rose 3.9% year/year after an upward revision to 4% in May. That is the other extreme of the debate from those saying a recession is just ahead. The Phillips Curvers view solid jobs and rising wages as inflationary despite what economic history shows. Wages tend to rise in a stronger economy; always have.

Moreover, the leading inflation indicators, the ones that actually accurately predict inflation (e.g. ECRI) as opposed to the gut-feeling guesses about wages and the so-called 'wealth effect' indicators, show continued declining inflation pressures. They showed a peak in the inflation pressures in October 2005 and though it took awhile before actual inflation started to fall, it is doing so with the PCE now within the Fed's comfort zone. The leading inflation pressure indicators continue to decline even now with the latest ECRI read (June) showing inflation pressures at its lowest level in 2 years. With inflation already in the Fed's comfort zone, this is telling those who care to look and accurately see the future that inflation is not an issue.

Jobs, housing, and the consumer.

As I started to comment above, jobs ARE important at this stage, not because they indicate what the economy is going to do, but because of all of the worry about what the poor consumer is going to do with the tanking housing market and all that mountain of debt that is purportedly burying them up to their necks. We hear on a daily basis prognoses of an imminent consumer collapse due to these among other issues. What the jobs report and unemployment report tell us is that consumers still have their jobs, they were not in any threat of losing their jobs during the slowdown, and with the economy expanding once more they are not going to lose their jobs. History shows us that a comfortable employee who fears no pink slip will continue to consume. Thus the jobs report confirmed the continued strength in the employment picture and thus the highly unlikely consequence the consumer is about to go turtle.

In addition to history there is another common sense consideration with respect to the consumer and housing. Let's say there is a serious housing slowdown, one much worse than the one we have now. After all the housing market was very strong, stronger than typical, and while the numbers are slowing fast, they are taking housing back down to more normal levels. Further, as we have discussed before, housing always leads a recovery and then falls off as the economic expansion matures. Housing was stronger and lasted longer this time because of 9-11 and artificially low Greenspan interest rates, but now because interest rates are rising as a RESULT OF MARKET ACTION, housing is tailing off. No big mystery here.

Now to the common sense consideration. If a consumer does lose his or her house but still has a job because the economy continues to expand (as the numbers are showing it is doing despite the housing fade), is that consumer going to work harder or work less? Arthur Laffer, one of the great economists since Milton Friedman, posits this question to those claiming the economy will sink due to consumer angst if the housing market continues to crumble. Common sense says the consumer will work harder to get ahead once again. That means the consumer continues consuming as he or she looks to get back to owning a home once again.

The real threat to the economy.

Inflation is not the problem; that battle is won for this cycle as long as the Fed doesn't get stupid and panic when some unforeseen event arises or if the economy continues to strengthen and it decides it has to tighten. Thus far Bernanke has been quite adept at gauging when to act either to tighten or to hold steady. At some point he will have to make the cut decision; the economy has remained strong enough, however, to avoid having to do that.

The real problem facing the economy is one we have discussed many times in the past: foolish policy decisions raising out of a political campaign and a Congress that took office with the idea it has some sort of mandate yet cannot seem to do one damn thing other than talk and bluster. The latter is not bad at all, but we are worried it is going to breed a sense of desperation that something, anything, needs to be done to show us all that the new power in the Congress is not in need of Viagra (i.e. is impotent). Congress does bad things when that mood takes over.

Right now the campaign trail is hot on protectionism. Friday perennial democratic presidential candidate and first class trade protectionist Dick Gephardt threw his support to Hillary Clinton. Clinton has been on the campaign trail talking a protectionist agenda. Clinton and Obama are co-sponsoring a China trade bashing bill; that is how bad it is right now. That is in addition to Schumer's repeated threats to take it to China. Where is Bill Clinton, the free-trade president? How could Hillary be so polar opposite in her views? Ironic isn't it? Many democrats in Congress pine for the days of the 'right' tax rates under Clinton yet they toss out all of the other policies he implemented that encouraged the expansion despite Clinton's tax hikes, e.g. free traded (NAFTA) and the capital gains tax cuts.

Protectionism strikes a sympathetic chord with the US worker. What is wrong, after all, with trying to save some US jobs? We have discussed before the need to invest in the future and in new technologies as opposed to trying to save some underwear and other low tech jobs. We should invest more in those technologies and getting the underwear makers better trained and educated to help push us into the future.

Instead we fall back on protectionism, thinking that will solve our problems. It won't. We blocked the Chinese national oil company from buying a US oil company. We block Dubai, our best ally in the Middle East, the one that lets us base operations in its country, from entering into a port management deal; not ownership, just management. There are valid policy issues in deciding to let these transactions pass or not, but it all sounds very 1980's and the Japan bashing. Japan was going to own all of the real estate in the US. Wesley Snipes and Sean Connery even starred in a movie with that theme. Guess what? It didn't happen. Japan spent a lot of money here in the US on treasuries and goods, and that allowed us to build our defenses and outspend the USSR into economic ruin. In the end we got what we wanted, we got some great technology as a result that pushed us into the technology lead, and Japan had to sell everything it bought when its country slipped over the brink.

Have you noticed the slide in the dollar? Countries are starting to diversify out of the dollar into other currencies and thus it is losing some of its mojo. Why are they diversifying? Not because the dollar is no longer a safe and solid store of value; after all the US economy is still the safest and best year in and year out. No, they started to do it when we started taking on a protectionist tint in our policies. China started to diversify after we blocked the CNOOC deal. The dollar took a further hit after the Dubai deal was killed. Foreign investors watched and they saw the US rebuff its best ally in the Middle East. If we would do that to Dubai we would do it to anyone. Now Clinton is proposing that China and others cannot own more than a certain percentage of TREASURIES (we are not even talking about real estate or companies). That is crazy and the rest of the world is watching. These actions are making the US a less desirable place to recycle petro and trade dollars and thus the demand for dollars has dropped and ergo the dollar's value. If they cannot use or recycle their dollars into US assets they are not going to prop up our trade deficit.

The sum total of this policy train wreck is a cheapening of the dollar. Thus far it has been an 'orderly' slide, i.e. not a massive tank. The move thus far, however, is inexorably lower, and with this protectionist fervor in the new congressional leadership, it is not going to improve. Bush can say he will veto any such action, but the foreign investors know an election is coming and that the GOP is on the ropes. Thus a veto won't do a whole lot of good near term.



VIX: 14.72; -0.76
VXN: 16.52; -0.57
VXO: 14.31; -0.42

Put/Call Ratio (CBOE): 0.88; -0.02

Bulls versus Bears:

Bulls: 49.4%. Now that is quite a drop from 53.8% the prior week and well off the spike to 56.7% a month back. Heading in the right direction but still needs to be lower to get to a comfort level. The 55% level is considered bearish, and it topped that level on this last run. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.

Bears: 18.0%. Bulls may be falling, but bears are as well, and that leaves the indicator mixed and thus less than an good signal. Quite a drop from 20.4%, and now at the lowest level on this cycle (hit 18.9% a month back). After hitting near 30% in March it has faded back in the subsequent rebound and this current selling is not jumping it higher. Looking only at this indication and the fact it has not risen as it did in March when the selling took hold, you would conclude that there is more selling to go. Well off the 27.5% hit in April. 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).


Stats: +9.86 points (+0.37%) to close at 2666.51
Volume: 1.629B (-1.77%). Volume was down yet again as NASDAQ moved to a new post-2002 high. No volume on this move leaves it susceptible to a pullback when everyone gets back into the market.

Up Volume: 999.629M (-51.497M)
Down Volume: 593.318M (+11.069M)

A/D and Hi/Lo: Advancers led 1.38 to 1. Weak all week.
Previous Session: Decliners led 1.01 to 1

New Highs: 109 (-2)
New Lows: 30 (-6)


NASDAQ continued its move above the upper channel line and its third session at a new post-2002 high. NASDAQ has now done what DJ30 did earlier, i.e. move through its upper channel, something SP500 could not do. The low volume shows the buyers were in charge but not in command. When the rest of the managers return this week and the new money for the month has been put to work NASDAQ will need a test. That is not bad as indicated last week as NASDAQ is in a position of strength, coming back to test the breakout versus failing at the resistance and having to regroup to take it on once more. With more managers coming back to the market in a new quarter we could see some more upside before that happens.

SOX (+1.04%) put on a solid show as well, reclaiming its breakout. As the techs improve the beaten up chips are making a move . . . again. This time we see if they can hold.


Stats: +5.04 points (+0.33%) to close at 1530.44
NYSE Volume: 1.247B (-9.28%). Volume was lower than Thursday but that only meant it was still very weak, well below average volume. All week was holiday light as NYSE indices moved higher.

Up Volume: 869.679M (+192.465M)
Down Volume: 356.679M (-318.017M)

A/D and Hi/Lo: Advancers led 1.52 to 1. Modest breadth to the upside once more.
Previous Session: Decliners led 1.2 to 1

New Highs: 177 (+38)
New Lows: 13 (-6)


This past week saw SP500 move up off the 50 day EMA and actually close above its November/February up trendline. It still has to deal with the June twin peaks; it closed 7 points off the mid-June intraday high so it is definitely in the zone to make a run to the former highs. More volume would help the move along, but when you look back at the March recovery from that selling, light volume plagued the recovery. We say plagued because we worried about it quite a bit, but the SP500 stocks kept moving higher so we kept buying them. Turned out okay.

SP600 (+0.08%) tried the mid-June high but could not punch through, showing a tight doji on the session. After a move higher that candlestick pattern shows some slowing momentum. A lateral move here for a few sessions sets up a breakout attempt as that gives it a bit of a breather.


The blue chips moved higher as well on their own low volume, continuing the move higher, but also working laterally as they approach the mid-June peak, the lower of the June twin peaks. Similar to SP600, a lateral move for a couple of sessions sets up a run at those highs. As noted last week, DJ30 is improving its pattern, setting up a breakout attempt.

Stats: +45.84 points (+0.34%) to close at 13611.68
Volume: 176M shares Friday versus 188M shares Thursday. Low volume on the upside advance, but not a really bad indicator as DJ30 is forming something of a handle here.



Earnings estimates may be a tad low . . . again.

Current projections for Q2 earnings are a 4.5% year/year growth rate, well off the previous string of gains. Q1 was supposed to be the first significant slowdown in earnings growth of this expansion with projections ranging from 3% to 6% growth. Instead earnings almost turned in another double digit quarter on the S&P.

Looking back at GDP growth rates for Q1 about all you can say is that it was quite crappy at 0.2%. Yet earnings almost hit a 10% growth rate. From what we can tell about Q2 right now, GDP is running in a range around 3% with an outside shot at 3.5%. The economy is expanding briskly again after a 3 quarter fade. We are expecting earnings to expand with it, at least more than expected in the range of 7% to 8%. As noted Thursday, the number of warnings has been quite low.

That leaves investors and analysts susceptible to an upside surprise, and that did wonders for the market in April and May. The only issue we see is that the market has rallied ahead of earnings, particularly NASDAQ with its breakout to a new post-2002 high. That always leaves stocks susceptible to a pullback ahead of or on the news. You know the old saying, anticipation is more fun than actually having. That leaves an opening for some giveback this week before earnings really ramp up.

That could be viewed as a problem, but given the gap higher to start last week and the low volume move higher, we did not chase a lot of positions. On a test, however, we get a passel of good buy points on some very good stocks, many that we had on the report but did not want to chase on low volume. We love the first test of the break higher, and a fade to start the coming week would set up stocks nicely for the meat of earnings that comes in the following week. The end of the week saw a rebound in not only the 'old' leaders of this move, but more technology stocks setting up to move higher. That bodes well for the market as money rotates or spreads out into new areas.

A familiar look.

As noted above, the low volume rise is a concern because low volume means that buyers were not really that strong on the move higher. It is not hard for some sellers to enter and sweep things back down. The question is will the sellers give it a shot or did they shoot their best shot in the two pullbacks in June.

March saw some high volume selling that pushed the indices down just over 3%. Then a double bottom and a recovery on very low, below average volume. Nonetheless the indices moved higher and higher on low trade. Leadership in energy, metals, materials and other industrials was enough as those areas got the money and the volume. We could be looking at the same thing here as the leaders in industry and now tech started to move higher together. Thus a bit of a pullback to start the week would be a very fortuitous event. If it doesn't come and stocks continue higher we will pick up the movers in good position to make us solid green.

Support and Resistance

NASDAQ: Closed at 2666.51
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak

2638 is the top of the November/February channel
2634.60 is the June peak
2632 is the November/February up trendline
The 18 day EMA at 2615
2601 is the mid-May intraday peak.
The 50 day EMA at 2578
2577 is the October/December/January trendline
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high

S&P 500: Closed at 1530.44
1527 is the late November to February up trendline
1528 is the March 2000 closing high
1541 is the June high.
1553 intraday high from March 2000 is the all-time index peak

The 18 day EMA at 1516
The 50 day SMA at 1512
The 50 day EMA at 1504
1490.72 is the early June closing low
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high

Dow: Closed at 13,611.68
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)

The mid-May peak at 13,556
13,490 is the upper channel line in the November/February channel
13,435 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,348
The 90 day SMA at 13,000
12,796 at the February 2007 high
12,700 is the early February peak intraday high

Economic Calendar

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

July 6
Non-farm payrolls, June (8:30): 132K actual versus 125K expected, 190K prior (revised from 157K)
Unemployment rate (8:30): 4.5% actual versus 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% actual versus 0.3% expected, 0.4% prior (revised from 0.3%)
Average workweek (8:30): 33.9 actual versus 33.9 expected, 33.8 prior (revised from 33.9)

July 9
Consumer Credit, May (3:00): $6.0B expected, $2.6B prior

July 10
Wholesale Inventories, May (10:00): 0.4% expected, 0.3% prior

July 11
Oil inventories (10:30): 315K prior

July 12
Initial jobless claims (8:30): 318K prior

July 13
Import prices, June (8:30): 0.5% prior
Export Prices, June (8:30): 0.2% prior
Retail sales, June (8:30): 0.3% expected, 1.4% prior
Retail sales ex-autos, June (8:30): 0.2% expected, 1.3% prior
Business inventories, May (10:00): 0.3% expected, 0.4% prior
Michigan sentiment, preliminary, July (86.0 expected, 85.3 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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