For anyone who has bottom fished before you know how difficult it is to catch a fish without getting caught on the bottom. You lose prized fishing tackle, your favorite fly, and not to mention your patience. I think traders this week could relate to that kind of analogy. This week has been littered with the lost lures and other fishing tackle of traders trying to fish for a bottom. So the question tonight, naturally, is did we catch ourselves a fish at today's bottom or just another water-logged boot. The answer will come tomorrow when we either haul it in or snap our line again. The techs and small caps led the way up today but they're the ones that got sold off more harshly the past 2 weeks. We don't know yet if it was just an oversold bounce today or the start of something bigger to the upside.
There were only a couple of economic reports this morning--trade balance and jobless claims at 8:30 AM and then EIA's oil inventory reports at 10:30 AM. For August, the trade deficit widened to -$59.0B from -$58.0B in July, but better than the -$59.5B economists had expected. That was good news/bad news as this was the third-worst trade deficit ever recorded. Imports rose faster than exports in August, much of it blamed on the higher costs of imported oil. The U.S. trade deficit with China widened to a record $18.5B in August and totals $126.2B so far this year. We'll have to wait for the September trade data to see what the impact was from Hurricane Katrina after it closed the Port of New Orleans on August 29th.
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Prices of goods imported into the U.S. climbed 2.3% in September, the highest in 15 years and above economists' expectation of +0.9%, with the costs of natural gas and oil continuing to be a key reason. Prices for imported natural gas rose 28.8% in September and imported oil prices rose 7.3%. Excluding oil, import prices climbed a record 1.2%. Excluding all fuels, prices rose 0.4%. This sparked concerns that the increase in prices and higher resulting inflation will keep the Fed on a more aggressive rate increase path. That was the reason for the immediate drop in the futures right after the announcement. From that pre-market low, futures then bounced into the cash open and then the market tried to rally a little more but once again got hit with selling that took it to new daily lows before bouncing into the afternoon.
The jobless claims number was better than expected, falling 2K to 389K in the week ending October 8th. Hurricanes Katrina and Rita accounted for 75K. The number of people collecting jobless benefits fell by 5K to 2.87M in the week ending October 1st and the four-week average of new claims fell by 8,750 to 395,750. A total of 438K hurricane-related jobless claims have been filed since Katrina hit at the end of August.
The EIA announced at 10:30 the oil inventories and reported a 1.02M barrel buildup in crude supplies (consensus was +2.0M barrels), a 2.65M barrel decline in gasoline inventory (consensus was -2.0M barrels), and a 3.41M barrel drop in distillates (consensus was -2.3M barrels). However, there was some good news about refinery utilization--it rose more than analysts had forecasted, operating at 74.9% of their operable capacity last week vs. the 74.4% consensus, so the hope is that inventories will slowly build back up and relieve pricing pressures. Oil and gas prices were essentially flat on the day.
The bounce in the tech stocks today was helped by a strong rally in the semiconductors and computer hardware. After getting pummeled after the close on Tuesday and staying down all day Wednesday, today investors couldn't get enough Apple (AAPL 53.74 +4.49) and it rallied strongly all day--getting it well above Tuesday's closing price of 51.59. Not all techs did well though--Comcast (CMCSK 26.85 -0.57) got hurt after announcing it may team with Google (GOOG 297.44 -3.53) to acquire a $5B share of America Online. Investors obviously didn't think that was a good idea for either Comcast of Google.
Healthcare helped lift the market after Johnson & Johnson (JNJ 64.06 +2.26) received favorable treatment in a Barron's article about JNJ stock. JNJ also filed an antitrust suit accusing rival Amgen (AMGN 75.82 +1.05) of illegal bundling practices in an attempt to push J&J's drug Procrit out of the market.
But other than the techs and small caps being up on the day, the blue chips treaded water, finishing about as flat as could be done. Both were in the red, down 9 days now except for a minor up day on Friday the 7th and Tuesday the 11th for just the DOW, but in the red today by less than a point each. The various indices are now near some potential support levels so let's see what the charts are telling us tonight:
DOW chart, Daily
Last week I showed a weekly chart of the DOW with some diamond patterns, which are bearish patterns at tops. The uptrend line from October 2004 is the trend line that signifies a break of the diamond pattern and is not a good sign. As you can see on the daily chart above, that trend line was broken on Monday the 10th. When the current decline finds a bottom and bounces back up it will be interesting to see how it deals with that broken uptrend line. Obviously a kiss goodbye with a retest and failure at the line (just under 10,300) would be very bearish, and I'd want to be short in a big way. Right now this index is trying to find support at its previous low of 10,175, its July low. If a low hasn't been put in yet, there's layered support between this level and 10K. It's not a good time to be short right now.
SPX chart, Daily
SPX looks to be probing for a bottom and in fact the daily candle looks like a hanging man doji and a green candle tomorrow would confirm the reversal pattern. But if the low hasn't been found yet, watch 1163. This is the level where support was found at the January and March lows this year. And just below that is potential support at the 50% retracement level (1160.75) of the 2000-2002 decline. For Gann followers, 1163 is also 180 degrees from the most recent high of 1233. Like the DOW, once a bounce gets started, watch the broken uptrend line at about 1191 for resistance. This level is also the 50% retracement of the April-August rally (it's currently fighting to hold onto support at the 62% retracement level--1178--but not quite doing it).
Nasdaq chart, Daily
The COMP was green today but it remains to be seen if this was just a dead cat bounce today or the start of something bigger to the upside. If it hasn't quite found its bottom yet (I hate when that happens), watch 2015 which is the 62% retracement of the April-August rally. If we see a larger bounce develop, watch potential resistance at the broken 200-dma at 2075 and the old neckline above that at 2100.
SOX index, Daily chart
Nice bounce off the 200-dma! Between the 200-dma at 433.54 and the 38% retracement of the January-September 2004 decline at 431 (notice how price has used the 38%, 50% and 62% levels this year), this was bound to be a good support area and it was. If it probes a little lower for a bottom, watch that 431 level. A larger decline will have it probing for support around 420 and then the uptrend line around 410. But if the current bounce progresses, it may find resistance at the previous 50% Fib level of 455.
One of the reasons given for the broader market sell off the past 2 weeks (and profit taking was particularly apparent in this year's big winners such as Utilities, housing and energy) is because of inflation fears. I think it's primarily due to a souring of investor mood which we can see all around us whether it's consumer sentiment, anger at our government or dissatisfaction in general. But pundits like to blame something so tag, inflation is it. Fears of growing inflation are certainly a legitimate concern for a couple reasons, not the least of which is because it's going to cost us more just to make ends meet. But the Fed is beating the war drums about it and is promising us they'll get aggressive in fighting it. That of course means they'll probably remove "accommodative" in their language and may even start raising rates 0.5% at a time instead of their usual 0.25%. What spooks the market is the Fed's history of overdoing it and the fear that they'll drive us into a recession. Guess what, they will.
The worst situation of course would be stagflation as we have inflation from much higher commodity prices, including energy, and that it will then slow our growth due to reduced spending (reducing demand for other products) and the higher interest rates will only exacerbate the growth problem. Hence stagflation is an ornery economic animal that's tough to do battle with. That would hark back to the days of the 70's and it was not a fun time in the stock market at that time. One report today may be a harbinger of slowing growth--the International Copper Study Group (ICSG) issued a report that showed global demand for copper fell 1.2% from January to July this year. Investors in Phelps Dodge (PD 118.32 -6.90) noticed though and they weren't excited about the news. Copper is a good metal to gauge economic health since it's used in so many industries, including housing, and if growth in demand for this metal is slowing, that's a sign of potential trouble ahead.
There are some very valid reasons for the market to be concerned about inflation and what the Fed might be forced to do. The last time the Consumer Price Index was rising at its current pace was in May 2001. Back then the yield on a 10-year Treasury note was 5.4% versus today's 4.4%, so a full percentage point below today's rate. It's roughly the same for the 30-year. And now the inflation picture appears to be worsening. The Producer Price Index, which measures wholesale inflation, and the CPI as we saw today have been increasing at a faster rate than we've seen in the past 15 years. Back in 1990, 10- and 30-year treasury yields were 8.1% and 8.2%, respectively. It would take a Fed rate increase of nearly 4 percentage points to get us to the same place. Now you can see why the market is so worried, and rightfully so.
What's a little surprising at the moment is that the bond market hasn't dumped harder along with equities. But one look at the TNX.X chart (10-year yield) and I see today the yield broke above a long term downtrend line from January 2000 through the March 2005 high. It still has to get above 4.693% (closed today at 4.475%), the March high, before making a statement and both the daily and weekly oscillators are looking overbought so I'm not seeing a rush to sell bonds or a whole lot of upside in rates right now. This bears watching obviously since it will forecast what the bond market is worried about and therefore what the equity market should worry about.
Some non-mainstream media sources are beginning to sound the alarm though. Even the Fed seems intent on getting the market to wake up to the fact that investors need to prepare for a more aggressive set of actions from the Federal Reserve as they get ready to raise interest rates to a much higher level, over a longer period of time than what the mainstream and the financial markets seem to be thinking at the moment. The last two weeks though probably means the Fed's action of taking a 2x4 upside the head of the market has probably caught its attention.
"The Fed's inflation hawks are sharpening their talons", this according to an article written by John Hilsenrath, who is apparently a high profile reporter who seems to be a vehicle the Fed uses to "leak" information, along with Journal reporter Greg Yip. The Fed seems to be upset with the lack of response to their year long rate hikes--the "conundrum" that Greenspan often talks about. According to Hilsenrath, "High energy prices, a potential shift in public psychology toward accepting higher prices, signs that businesses are using up spare capacity and a steep federal budget deficit combine to make Federal Reserve policy makers more nervous about the inflation outlook. A pause in rate increases the next few months, considered a real possibility after the economic disruption caused by Hurricane Katrina in late August, looks increasingly unlikely. Indeed, the Fed may raise rates even further than it had thought likely before Hurricane Katrina struck."
Finally, the Fed is worried about the rising budget deficit. Hilsenrath wrote: "some officials worry that the loss of fiscal discipline will increasingly complicate their own job." Dallas Fed president Richard Fisher last week picked up Mr. Greenspan's theme, saying: "I will never vote to monetize fiscal profligacy." This means the Fed, for added insurance against inflation, may raise rates further than it would without the deficit. The problem with this jawboning is that the Fed is not backing up their words with deeds when it comes to money supply as measured by M-3. They in fact Have been monetizing fiscal profligacy since they've been pumping up the money supply at a far greater rate than both GDP and CPI. Perhaps they're getting ready to start draining the pond and want us all to pull our boats out of the water. The bottom line is that the Fed is now very worried that the inflation monster will start snatching bodies and Greenspan is hoping to avoid getting eaten.
Banks have been giving us a heads up for quite some time that something smells on Wall Street. Their drop since July has been precipitous and now with the drop back below its April low, it's one of the first sectors to do so.
BKX banking index, Daily chart
The banks are a major sector to watch as far as health of the market. It's been telling us the patient is sick for quite a while. This can't necessarily be used as a short term indicator but it was a clear signal to longer term investors to tighten up on their long positions. Price fell out of the funky looking down-sloping diamond pattern so watch for a bounce that finds resistance at any of the nearby trend lines. The steeper downtrend line from September coinciding with the broken uptrend line from May 2004 near $95 will be formidable resistance.
Oil chart, December contract, Daily
Oil found support at the uptrend line from last December, just above $60 but appears to be bouncing in a corrective pattern. It could bounce up and down over to the current downtrend line while hugging the uptrend line but so far the bounce looks like it will fail. A drop below $60 will likely take it down to its 200-dma near $56.50.
Oil Index chart, Daily
The oil index is finding support at the mid line of its longer term up-channel at 510. It looks ready for a bounce and in fact after a 5-wave move down from its high, it should be getting a corrective bounce any day. If it works its way a little lower first, look to the 200-dma at 484 for support. The fact that the move down from its high is impulsive (5-wave move) tells me that the decline is far from over. An impulsive move down here should be followed by a corrective rally (some form of a 3-wave or overlapping and choppy bounce) that could make it back up to the 50-dma and that will then be followed by another impulsive decline. Very likely this index will head down to the bottom of its up-channel and I would not think about being long this index until that were to happen, and maybe not even then. Short the rallies on this index.
Transportation Index chart, TRAN, Daily
The Trannies are bearish. If this index bounces up to the broken uptrend line and 200-dma at 3627 I'd look for shorting candidates. It may not even bounce that high as the current pattern, from an EW perspective looks very weak and we could see an acceleration to the downside. But any rally back above its 200-dma would turn the pattern into a potentially choppy sideways move and I would steer clear of trading this index.
U.S. Home Construction Index chart, DJUSHB, Daily
If the housing index continues to trade well technically, as it has been, we should see a sideways/up consolidation period before continuing lower. It should find support at the bottom of its current down-channel while it relieves some of its oversold condition before it then heads lower towards its longer term uptrend line around 780. At that uptrend line it will likely consolidate for an even longer period of time before finally breaking below it. Short the rallies in this index.
U.S. Dollar chart, Daily
Inflation worries are supporting the dollar. As long as those worries continue, the dollar will likely continue its rally. The price pattern of the rally this year suggests it will continue into the end of the year and has an upside target in the upper 90's. But first we could see continued consolidation and a drop back down to its 50-dma or even back to its uptrend line near its 200-ema. The fact that the 200-dma has swung back up is bullish, at least for now. Longer term (beyond next year) the greenback will probably not look so good.
Gold chart, August contract, Daily
My gold chart got messed up with some errant price spikes so ignore those red sticks. Gold is at an interesting point and if you're long the yellow metal you may want to tighten up your stops. There appears to be an ascending wedge forming since the late September high and the negative divergences (now skewed on my chart due to the price spikes) support this interpretation. It suggests one more minor new high to finish the pattern and I'd get ready to bail, or go short. If price breaks below 470 now, it could be an indication the high is already in. What I can't quite figure out yet is whether the current high (or one more minor new high) will lead to just a consolidation near the highs (probably staying above 460) before heading higher again (which is what I've depicted on the above chart), or if instead we're putting in a more major high and we'll get a pull back towards 400. Once the pullback gets started, if it's corrective (overlapping, choppy, sideways/down kind of affair) then get long the pullback. If it starts impulsing lower, stay short gold.
Tomorrow morning will be busy with economic reports, including the biggy, CPI (since the market has been fretting about inflation). It's probably why the market couldn't get going today. Shorts are nervous about giving up profits and longs are nervous about catching falling knives. Neither side was really able to move the market today.
Tomorrow's economic reports include the following:
Earnings reports kick into gear next week so it's been relatively quiet on that front this week. And as usual, the market reacts in unpredictable ways to earnings reports anyway. Just look at AAPL. Those who sold Tuesday night/Wednesday morning, taking a big loss, were not happy campers if they got left in the cold after today's strong rally. It's why I trade the charts and not funnymentals. The charts reflect investor mood and that's what I trade.
For October and the 4th quarter, the DOW and S&P have lost 2.8% and 3.2%, respectively. This makes the start of this October the worst in 10 years. So not since 1995 have we seen an October start out this bad. But hey, it could be worse--the Stoxx 600, the major exchanges of 17 European countries, has dropped 3% this quarter, making it the worst-ever 4th quarter start and biggest slide since calculations began in 1987. For those who are still holding out hope that 2005 will be an up year, we need to do some serious rallying. I don't believe it will happen.
Tomorrow could be tricky. We don't know what the reaction will be to tomorrow morning's reports but I suspect it could whipsaw both sides. I'll be staying flat until the dust settles--there are way too many pretty busses that come by every day, almost every hour, for me to hitch a ride. I like wild rides but only if I'm strapped in and know that the most I'll lose is the cost of the ticket and maybe lunch. I believe we're close to support and getting ready for a larger bounce but bottoms, like tops, can be hard to catch without getting whipsawed out of your trades before it finally takes off. I prefer to let the market show me it's made a bottom (impulsive climb, breaking of downtrends, etc.) and then buying the pullback. I may miss the bottom but by the time I get onboard I've still got all my fingers and toes. For those who follow us on the Market Monitor I'll do my best to identify the bottom for those who like to be daring, and the pullbacks that will make a good buying opportunity. I consider the short side right now to be too risky--I don't see the proper risk:reward ratio for that kind of play anymore. Good luck and see you on the Monitor.