Thursday, November 3, 2005
Issue Contents:
| 08:39 | The Day Ahead Economic releases and news |
| 09:28 | Swing Trade Setups Featured charts for Thursday November 3 |
| 09:37 | Market Direction Major targets being hit |
| 10:11 | Word from the Fed Testimony and speeches |
| 10:22 | Futures Key Levels and a heads up |
Good morning, today is Thursday November 3, the 307th day of 2005.
The European Central Bank held firm on interest rate policy, again1, with a predictable impact on the Euro. Perhaps the discussion by the ECB to follow later this morning will shed some light on the potential for future rate increases.
On the other side of the Atlantic ocean, traders are celebrating strong Q3 US Productivity numbers just released2 – the disinflationary nature of these numbers gave rise to some market celebration, causing pre-market futures to spike up 0.3%.
Crude is up over one percent, natural gas (report due at 10:30) is also up but marginally so. Fed Chairman Alan Greenspan will testify before the Joint Economic Committee starting at 10 am—his prepared testimony should be simultaneously released at the Federal Reserve Board web site.
Market Statistics for Wednesday November 2, 2005
| Symbols in Up Swings | 494 |
|---|---|
| Symbols in Down Swings | 179 |
| Up/Down Swing Ratio | 2.75 : 1 |
| Up Bars | 56% |
| Down Bars | 19% |
| Inside Bars | 10% |
| Outside Bars | 12% |
| Close > 20EMA | 82% |
| Close > 50SMA | 52% |
| Close > 200SMA | 55% |
| 20EMA > 50SMA > 200SMA (trend up) | 30% |
| 20EMA < 50SMA < 200SMA (trend down) | 29% |
US Market Calendar
- 6:00 am: Monster Employment Index
- 7:45 am: ECB Interest Rate Policy Announcement1
- 8:30 am: Productivity – Q3 Preliminary
- 8:30 am: Initial Jobless Claims – Oct. 29th week
- 10:00 am: Factory Orders – September
- 10:00 am: Non-mfg ISM Index – October
- 10:00 am: Federal Reserve Chairman Alan Greenspan testifies before the Joint Economic Committee
- 10:30 am: EIA Natural Gas Storage Report
- 11:00 am: Chain Store Sales – October
Canadian Market Calendar
- 8:15 am: Foreign Reserves – Oct
Earnings and the Federal Reserve
For earnings highlights, please see today's WSJ Earnings Calendar.
For a list of upcoming speeches, congressional testimony, Federal Open Market Committee material, and statistical releases, please visit the What's Next page of The Federal Reserve Board website. Recently released Federal Reserve Board material, including market moving FOMC decisions and speeches by members, will be found on their What's New page.
1 3 November 2005 – Monetary policy decisions
2 U.S. Third-Qtr Productivity Rises at 4.1% Rate; Costs Fall 0.5%
Notes
- Protect profits; stuff has been moving up now – remember when we turned from leaning to a negative bias, back to up? That was weeks ago! It didn’t feel much like a rally then, but now there are ample profits in some of those positions, and certainly in positions taken over the last week. Don’t give it all up… but don’t close out everything either. Take some profit, leave some on, and subscribe to the golden rule: NEVER allow a winning (up beyond just the day of entry) position to turn into a loss.
- After a couple of days of up, we know there will be slim pickings left to move up; have a look at the Swing Outliers in the latest scan and you’ll see what I mean.
Long
VRSN -tech/internet
SGP – drugs, reported. If this one doesn’t work out today monitor very closely for LONG trades for the next 1 – 2 days.
MRK – drugs
LVLT – I don’t like the low-cost stocks much myself but am willing to give this one another go.
Special Situations
CCU
At some point in the next day or two markets are probably going to stall – in particular near the 2167 area on the Nasdaq Composite, which, if price hits again, will mark a 100% unwinding of the big October sell-off.
Gap up today in markets may result in some profit taking; lets be cautious out there but also remember that the market shifted into buying-the-dip mode over the past few days. Look for opportunities on any decline – but lurk above the decline and make the market prove it to you that it wants to come back up!
Speech by Vice Chairman Roger W. Ferguson, Jr.
Monetary Credibility, Inflation, and Economic Growth
To me, it is axiomatic that monetary credibility, by reducing the level and variability of inflation, lays the foundations for stronger and more-sustained economic growth.
One does not have to look far to see examples of the practical importance of monetary credibility. In the past two years, crude oil prices have about doubled. During the 1970s, similar run-ups set off sharp increases in global inflation. Today, by contrast, core inflation rates both in the United States and abroad, while they have moved up some, remain essentially contained. In large part, they remain so because central banks, including the Federal Reserve, have substantially bolstered their commitment to price stability since the 1970s and markets are now much more confident that monetary authorities will keep inflation from rebounding.
Mr. Ferguson concludes:
Let us not forget that the declines in inflation over the past two decades and the resulting boost to monetary credibility we currently enjoy were earned with some economic pain, as the pace of economic activity was slowed, at times severely, to bring inflation down. With longer-run inflation expectations better anchored now throughout the world, I believe that global economic growth will be stronger and more resilient as a result.
Clearly the market grumbles about rate increases, but we’d all grumble about high inflation even more. Those of us who remember mortgage cost inflation 20 some odd years ago never want to go there again. Mr. Ferguson is reminding us that maintaining credibility means the Fed will keep on removing policy accomodation while it can, and that we should accept the medicine as a good thing.
Testimony of Chairman Alan Greenspan
Economic outlook
Skipping right over the bulk of his testimony which focusses on the impact of weather disasters, we find this:
Contributing to the disinflationary pressures that have been evident in the global economy over the past decade or more has been the integration of in excess of 100 million educated workers from the former Soviet bloc into the world’s open trading system. More recently, and of even greater significance, has been the freeing from central planning of large segments of China’s 750 million workforce. The gradual addition of these workers plus workers from India—a country which is also currently undergoing a notable increase in its participation in the world trading system—would approximately double the overall supply of labor once all these workers become fully engaged in competitive world markets. Of course, at current rates of productivity, the half of the world’s labor force that has been newly added to the world competitive marketplace is producing no more than one quarter of world output. With increased education and increased absorption of significant cutting-edge technologies, that share will surely rise.
But this seminal shift in the world’s workforce is producing, in effect, a level adjustment in unit labor costs. To be sure, economic systems evolve from centrally planned to market-based only gradually and, at times, in fits and starts. Thus, this level adjustment is being spread over an extended period. Nevertheless, the suppression of cost growth and world inflation, at some point, will begin to abate and, with the completion of this level adjustment, gradually end.
Its interesting that Mr. Greenspan should focus on big picture impacts of labour on the economy, and he uses his last testimony before this committee to remind them of a recurring theme in his talks:
But even apart from the hurricanes, our budget position is unlikely to improve substantially further until we restore constraints similar to the Budget Enforcement Act of 1990, which were allowed to lapse in 2002. Even so, the restoration of paygo and discretionary caps will not address the far more difficult choices that confront the Congress as the baby-boom generation edges toward retirement.
Indeed this is a key issue, as forecasted obligations far outstrip the ability of the country to fund them.
Key Levels: 10500 and 10450, should price pull back today instead of steam ahead to the next major overhead target, 10600.
Key Risk: For some time we’ve been watching the rising wedge develop; while I still have a positive bias on where price is heading in the intermediate term, I never dismiss such formations. The juncture of a wedge breakout and key resistance is particularly meaningful; its the outcome that is unknown today. Sellers will find such a chart supports their case if the market fills the morning gap and keeps on selling off; buyers will get support from longer term sellers (shorts) if the market holds up here – another round of longer term short covering will see to that.
So it might be a bit bumpy today or tomorrow – but unless price makes a truly dramatic reversal, it will make sense to retain a long bias and look for long-side opportunities should a sell-off show up.
Its certainly possible the market will lever off the current momentum and head directly higher; in that case we’d like to see price close well above 10550 today to remove some of the technical risk present here on the chart, as price breaks above the wedge where key resistance lives, at the breakdown area from early October:
