The day after opex often sees a reversal of what was going on into opex. The large number of long put positions, and probably short calls, lent support to the market as traders were either taking profits on their positions or covering as the market made its way higher. In either case the selling of puts and buying calls supports the market. When that activity is finished the support (or selling in a down opex week) goes away and we often see a reversal. This would be especially true if traders are reinitiating trades that they covered the week before. For example, if a trader was forced to cover his/her short call position but still believed the market will work its way lower, then that trader will likely sell more calls the following week and that would have a depressive effect on the market. It's why we often see opex Friday mark a turning point in the market as well.
I (Keene Little) will be filling in for Jim tonight. Feel free to fire questions my way about anything said here. The question tonight, as I see it, is whether or not we have a potential turning point in the market. The high on Friday, and this morning, was essentially a retest of the January high for the S&P 500. The daily divergence against MACD and RSI continue to support the idea that we're in a topping formation so a retest of the January high makes a lot of sense. The DOW's new high is not necessarily bullish and in fact is bearish without the participation of the techs and small caps. It looks like a defensive move as funds move into larger and more liquid large caps in case they need to bail in a hurry. I'll cover more on the charts in a bit.
Today was a quiet day as far as economic reports and earnings go. This week will be quiet in that regard which leaves the market to fend for itself. Without something to distract it and keep its hopes up, investors may start to get nervous if new highs aren't made every day. This morning we got the Leading Economic Indicator for January which at +1.1% was higher than the expected +0.5%. This is the biggest gain since last June and with 4 straight months of increases it's the best record since 2004. As I will discuss a little later, this LEI is actually a misnomer since it's really not a leading indicator but instead is just another rearview mirror measurement of our economy. There are better leading indicators. The prior LEI number for December was revised up from +0.1% to +0.3%.
There wasn't much of a reaction from the market after the release of this data. Of the LEI's 10 components, 6 were higher, led by a drop in weekly jobless claims, an increase in building permits, improving vendor performance, higher stock prices and a narrower interest rate spread. Interestingly the negative contributor was lower consumer expectations. I say interestingly because that's one of the truly leading economic indicators. I'll show why in a minute.
Wal-Mart (WMT 45.73 -0.36) issued an earnings report this morning and reported that said same-store sales saw a +13.4% increase in profits. They reported earnings of $3.6B in Q4, or 86 cents/share, vs. $3.2B, or 75 cents/share, a year ago. This was on revenue of $90.13B. Estimates had been for WMT to earn 83 cents/share on revenue of $90.46B so the company did a little better on profit but they were a little light on revenue. Mother Market doesn't like light-on-revenue so WMT dropped on the day. WMT had also warned of "challenges" in its financial forecast and that spooked investors as well.
Later in the day we got the minutes from the last FOMC. Other than a flurry of activity around the release of the report, prices really didn't move much from where they had been prior to the release. The minutes showed the committee members were unanimous on their decision to raise rates 0.25% and felt they were "close" to stopping the hikes but that they might need to keep raising rates to contain inflation. So if I've got this right, a "few more hikes" means they'll be stopping soon. I'm glad they cleared up that question for us. Some members of the committee continue to see the core rate of inflation as a threat and are worried more about the upside risk of inflation. There was a general consensus that the economy would bounce back from its slow 4th quarter and that higher energy prices will continue to put upward pressure on the core inflation rate.
While stocks moved lower by the end of the day, bonds barely reacted to the minutes. Seems the bond players already had it figured out and there were no surprises. Fed funds futures currently show a 75% chance we'll see a rate hike to 4.75% in March and a 75% chance for another hike to 5.0% in May. The FOMC minutes also showed an initial discussion about disconnecting the policy statement after each meeting from the formal vote on rates. It seems this was a Greenspan thing and some feel they shouldn't be linked. The big question on most traders' minds continues to be whether the FOMC will once again raise rates for too long and to a level that is too high which will choke off the economy's growth. History says they will once again do that as they review numbers that are at least 3-6 months behind describing changes that have already happened.
If you read Jim's weekend Wrap you know that the market stopped at some potentially formidable resistance levels. Today we got a pullback which leaves us guessing now as to whether it will be just a pullback before blasting higher or the start of a much larger pullback. It's a little early to answer that question but we'll look at some levels to watch for guidance.
DOW chart, Daily
Resistance at the trend line along the highs since July 2005 is holding. If the daily oscillators roll back over here it will a negative divergence on MACD (and RSI). At a minimum it should be setting up a deeper pullback but there's the possibility we're going to see a minor new high before it does that, just enough to catch the bears with, um, their shorts down (sorry). It's not a given that it will get a minor new high, just a threat to shorts since the move down today wasn't exactly impulsive. If it's just a corrective pullback we can expect a new high out of it. The question tonight is how much of a pullback can we expect.
DOW chart, 60-min
A closer view of the move up since the low on Feb 7th shows a parallel up-channel in play and we could see price pull back to the bottom of it which is just above 11K. Between the bottom of this channel and the 11K century value, look for the bulls to defend that area. If the uptrend line breaks and the DOW gets back below 11K, the uptrend line from October, currently near 10830 could be in the works if we get a multi-week pullback.
SPX chart, Daily
SPX found resistance at the trend line along the highs since January 2004. Price briefly popped above this line at the January high but was unable to hold it. There's also a Fib projection at 1290.58 that could be in play here (today's early morning spike high was 1291.92) so there are a couple of reasons to think it's possible that we're putting in a major high here. It's too early to tell though. It will depend on how the pullback develops. If we start to get some sharp moves to the downside with little overlap between the highs and lows of the move (making it impulsive), then at a minimum we're going to be in multi-week decline that retraces a good portion of the October rally, possibly down to the uptrend line from August 2004. But if we see a lazy overlapping choppy kind of move down, that will suggest it's just a corrective pullback that will lead to another move higher which is what I depict in a closer view of the current leg up.
SPX chart, 120-min
The broken downtrend line from the January high is currently near 1278.50. Watch that area for support since a kiss goodbye against that downtrend line would be bullish. The wave count that I show on the chart shows the need for a 5th wave higher and SPX 1305-1310 would be a target as we head into March. But a pullback must stay above the 1274.56 high on Feb 9th to keep this bullish wave count alive (wave-4 can't overlap with wave-1). Jim has often mentioned being bullish above 1275 and bearish below. Based on this pattern and wave count I completely agree.
Nasdaq chart, Daily
The COMP is stuck between trend lines. It recently bounced off the one along the highs since January 2004, currently at 2243, but got stopped by two that intersected near Friday's high of 2293.90--the downtrend line from January's high and the broken uptrend line from October. May the strongest trend line win and follow that direction. A shorter term perspective on this index leads me to believe that it will break to a new low but the jury is still out as to what that means for the longer term pattern. It's possible that it will find support at or above 2200 as it forms a bull flag for its pullback since the January high.
SOX index, Daily chart
The SOX is peering over the edge. Its short term pattern looks bearish in that it should press lower. If it presses lower though it will break its uptrend line from October (at 524) and maybe even its 50-dma at 517.44, which would obviously be bearish. The DOW's rally without the support of the semis is not bullish. Instead it will look very defensive as the fund managers jump out of techs and small caps and climb into the protective shells of the more liquid large caps. If they need to bail in a hurry it's much easier and less painful to issue large sell orders out of large caps than the smaller ones. Keep an eye on this index even if you don't trade it.
BKX banking index, Daily chart
The banks continue to be confusing. The hard rally off last October's low has been followed by what appears to be consolidation. That should be bullish. But the bearish divergences suggest otherwise. I'm thinking this is topping action but that's more of a gut feel than anything else. If the daily oscillators start heading south again, it will turn its weekly chart back down. But if the banks can rally to a new high and make it stick, that would be a bullish statement that the bears better listen to.
I came across some information about families, their incomes and spending (relating it to consumer spending) and why it's different this time. Unfortunately, being different this time is not a good thing as we as a society are more vulnerable to economic shocks to our financial system. I'll share some of this with you tonight and wrap it up in Thursday's Wrap as I think it's important to understand some of this and how and why it could affect the stock market.
We often hear about how the consumer is such a significant part of the economy, generating some 2/3 of our GDP. If the consumer sneezes, our economy catches a cold. If our economy catches a cold, other countries might get the flu. We've become more and more of a global economy and therefore the U.S. consumer demand has helped drive the manufacturing bases of countries like China. Any pullback in U.S. consumer spending could cause a slowdown in more than just our country's GDP. As long as the spending continues, all will be well.
What is interesting is how much of a difference the family situation is today from how it was 30 years ago as far as tracking where the money goes. Today's dual-income families actually have less discretionary income today than did the single-income families of the 1970s. The fixed costs (e.g., mortgage and property taxes, food, child care, health and other insurance, car and taxes) have climbed steadily higher as a percentage of total income. This has left less money today for discretionary spending on items such as vacations, recreation and other nice-to-have things. While there has been a lot of irresponsible spending, and the resultant higher bankruptcy rate, many families are simply being squeezed harder today than the previous generation.
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Having a higher percentage of their income going to fixed costs is in spite of some significant cost savings for some of these items. Goods coming from overseas, efficiencies in the farming system and manufacturing productivity improvements are some of the ways we've seen price containment, and reductions in many cases. The Bureau of Labor Statistics data shows that families spend about 33% less on clothes today than 30 years ago. A family of four spends 23% less on food (restaurant and home meals combined) and 51% less on major appliances. We're spending more on entertainment and computers. In the 1970's a single-income family's discretionary income was a little less half its total income (46%). Today's dual-income family has less than 25% of their total income available for discretionary spending.
Therefore it's not hard to understand how much easier it was for the single-income family to weather a financial "dislocation". If the primary breadwinner lost his or her job in a single-income family, the non-working spouse could go out and get a job. This in combination with cutting back on their discretionary spending enabled the single-income family to weather the storm and bounce back faster. We have more two-income families today but that has actually made us more vulnerable--they are less resilient to any disruption to their income stream. Today, if one spouse loses his or her job, they have little cushion available to them before they're in serious financial jeopardy and they will take much longer to bounce back.
That sets the stage for where we are today. If families become nervous about the future (watch the expectations component of consumer sentiment, which dropped in the most recent survey) they instinctively close their wallets and stop spending. They understand they're walking a tight-rope with no safety net below them. When the family gets hit with higher gasoline costs, or higher energy costs for their homes, or higher monthly payments on credit cards (as mandated by Congress starting last month), or higher medical costs, or education, or... You get the picture. Discretionary spending gets squeezed more and more and consumer spending will continue to drop.
But consumer spending hasn't dropped and that is what has kept our economic ship afloat. At least it hasn't dropped until relatively recently--we saw a big dip in GDP in the 4th quarter last year and while it remains to be seen if it will be revised higher, or recovers, the fact remains, consumers are beginning to close their wallets. People cut back sharply on purchases of big-ticket "durable" goods, such as cars. Spending dropped 17.5% which was the sharpest decline since the first quarter of 1987. What we don't know yet is whether or not this drop in consumer spending will continue or if it instead was an anomaly. We need to watch consumer sentiment closely because this will give us a heads up as to what's going on in the consumers' heads.
I'll wrap up this discussion on Thursday and show the tight correlation between real hourly earnings, consumer spending and the stock market. It makes for an interesting leading indicator for the stock market and suggests there's not a whole lot else we need to watch. I'll leave you with a chart that I'll discuss in more detail on Thursday but by studying it I think you'll get the idea of the importance of the correlation between spending and the stock market. Please excuse the low quality of the charts--it's hard to get all the data squeezed in and still leave it viewable.
S&P 500 compared to Consumer Spending, 1965-2006, courtesy stockcharts.com and Joe Ellis from his book "Ahead of the Curve"
In the meantime, getting back to the charts, let's take a look at another index that is greatly affected by consumer spending, the housing market.
U.S. Home Construction Index chart, DJUSHB, Daily
The housing index is getting a little oversold bounce and it's a question how far the bounce will get. It could consolidate sideways here to relieve the oversold conditions or it might make it up to its 50 and 200-dma's at 937 and 947, respectively. Once the correction is finished I'm expecting a new low and I continue to like the combined support of the uptrend line from March 2003 (which should be strong support) and the neckline of a potential H&S pattern that is easily visible on the weekly chart. These lines cross at 822.
Oil popped higher today which had been expected after the weekend news coming out of Nigeria. Oil supply was a question after violence in Nigeria forced oil companies to stop production. Royal Dutch Shell halted 455,000 bpd production after Nigerian rebels kidnapped 9 foreign workers. In addition to Nigeria there is still concern about the potential problems being stirred up by the idiot running Iran who seems to have more concern for wiping Israel off the map than peace and stability in the world. Nice to have a cause. At any rate Russia and Iran were unable to come to an agreement over the weekend and that further fueled (no pun intended) worries about the oil supply in the region.
Oil chart, April contract, Daily
It's hard to see on the chart but there's a little doji right at the broken uptrend line from December 2005 where oil closed at $62.45 (note this is the April contract, the new front month). It's possible the bounce will proceed higher in which case it could make it up to its 50-dma at $63.81 or its 20-dma, coming down hard but currently up at $64.68. A 38-50% retracement of the decline from Feb 1st gives us $63.25-$64.52 as Fib resistance. Therefore I would expect resistance between its current level up to the $64.50 area. As Marc pointed out earlier today in the Futures Monitor, there could be a H&S pattern developing here with the right should currently in progress. I show the H&S projection with the blue vertical line to just below $50. The significance of that is that is matches almost to the penny the EW Fib projection for wave-C where it would equal 162% of wave-A which is a very common Fib relationship between these two waves. The first Fib projection of $57.29 is where we'd have equality between those two waves and may match uptrend support from January 2004 if the decline moves into the end of March before it gets down to there. A break of that uptrend line from January 2004 would be a big deal.
Oil Index chart, Daily
The oil stocks are getting a nice little bounce with oil. The 20-dma at 570 stopped today's advance as did the mid-line of its 1-year old parallel up-channel (which also held back price in November and December). Just above the current price is potential resistance at its 50% retracement of the decline from January 31st, at 572.57. I expect this index to roll back over either with oil or in advance of it.
Transportation Index chart, Daily
After completing what looked like a picture perfect 3-wave move up above its ascending wedge and dropping back inside, the Trannies are currently hiding their intentions for the next move. Its daily pattern looks like a perfect setup for a decline from here. The shorter term pattern makes it appear as though it could press to a minor new high before rolling back over. For the shorter term trader it makes a difference but the longer term picture here is bearish. Whether we get a minor new high from here or not, this should be topping in a major way. Last Thursday I laid out, with a few chars, why I thought the Transports were giving us a major long term sell signal which of course would be bearish for the broader market.
U.S. Dollar chart, Daily
The US dollar looks like it needs to work off some overbought conditions and may pull back as far as its 200-dma just above $89. But it might hold above its 50-dma just under $90 or its 20-dma currently at $89.82. So let's say support will be in the $89-90 area. I expect the dollar to continue pushing higher and the upside targets of $94-96 will continue to hold until it proves otherwise (with a break below the January low of $87.83).
Gold chart, April contract, Daily
Gold has pulled back from its Feb 2nd high in what appears to be a 3-wave move. This is so far significant because it means it's a correction to the longer term rally. Gold bulls will have an opportunity to buy more gold at lower prices. I'm expecting much lower prices yet (that initial move down was probably only wave-A and the current bounce would be part of wave-B which will be followed by another decline) and the pullback should last several months and may even pull all the way back to where the latest rally started--down near $440. That remains to be seen and will depend on how the pattern unfolds. But it's clearly way too early to be thinking about buying gold and would instead be looking to short it (if you like to trade the futures or optionS on something like XAU).
Results of today's economic reports and the rest of this week's reports include the following:
As can be seen, this will be a quiet week as far as economic reports go. Tomorrow we will have Core PPI and PPI before the bell and these have the power to move the market so watch the futures react to this number. Crude Inventories at 10:30 could influence the price of oil and the rest of the market if the move is large enough. Thursday we get Initial Claims and Help-Wanted Index and then Friday is Durable Goods Orders. Company earnings reports are winding down as well so we shouldn't have much that will move the market. That can be good or bad depending on investor mood. If the mood is profit-taking we'll have a down week otherwise we could see a little more of a pullback and then continuation higher.
For numbers fans, there's an interesting cluster of dates around February 15th to March 7th where we have several Fib timing windows congregating. These Fib windows are based on prior turn dates starting at the DOW high on January 14, 2000. Based on the number of days between turns and the Fib relationship between those dates (specifically 38% and 62%), there are several dates that are pointing to the window from last week to the first week of March as a prime time for a major turn in the market. Considering the fact that we've rallied up into this window it very likely means we'll find a major high and a turn back down.
In addition to these Fib timing windows, I like to follow Jeff Cooper who is a wiz at Gann relationships and his use of the Gann Square-9 chart, or what he calls his Wheel of Price and Time. It is uncanny how levels across this circle end up being support and resistance at price levels and calendar dates. He points out the significance of SPX 1290 and how a retest of the January high may have a lot of meaning on the Square-9 chart, especially since it occurred on February 17th on his chart. The next higher level of importance from a Gann perspective (and Fib) is the 1305-1310 area.
Lastly, there were 742 trading days from the March 2000 high in the SPX to its March 2003 low. From the March 2003 low to today's high is 742 trading days. Talk about symmetry if today's high marks a major turn date! I've mentioned on numerous occasions how vulnerable this market is and it wouldn't surprise me in the least if we make a high with as little fanfare as this. Trade carefully right now and good luck tomorrow. See on the Monitor.