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world stock market, trend trading stock
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3/2702 Investment House Daily
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SUMMARY:
- Small and mid-caps continue to lead a 'dull' market.
- Earnings warnings are still out there: JNPR warns after hours.
- New home sales still up. Is there a strong recovery ahead?
- Japan more confident? Small businesses feeling better.
- Subscriber Questions
Another sluggish session in the big indexes as small and mid-caps hit new highs.
Lets see. It was Wednesday, so this was the 'fade, rally, fade, then rally for a slight gain' pattern. The big indexes are marking time until the big money players come back from vacation next week. They are doing the minimum it takes to hold more or less steady. This action has been just like the summer doldrums. Not even the end of the quarter has generated any real activity.
The big caps may be languishing, but the smaller issues continue to move up. Earlier in the week we said the stocks in good patterns were just using the selling to consolidate for the next move higher. Today they were moving well. The small cap and mid-cap indexes hit new highs on the session, evidence that their stocks had made the pullback and once again are out in front of the rest of the market.
First brand name earnings warning in technology.
After the close JNPR in the networking sector announced that it would miss on its revenue numbers by $30 million (about 20%) and earnings would be 'just above breakeven.' With estimates at +0.02, I guess that means +0.01. The stock was down about 50 cents after hours; at 11.90 before the news, that makes the loss about 4%. From $240 (where it used to trade), the loss is already built in on the order of about 95%. Seems investors already knew the stock did not have much hope for the stock or the sector that suffers from massive overcapacity.
This won't be the last one to come. LU, NT, and NOK have already said sales were going to be disappointing, and we can expect other telecoms, networkers, and fiber gear makers to warn some as well. Semiconductors probably won't warn; they are going to tout that they see the bottom or that Q4 or Q1 was the bottom. that is something we heard last quarter; investors are going to need to see some tangible improvement in Q2 if not Q1. As far as tech sectors, however, the chips will most likely be the first big tech area to improve. Also, we do note that the number of warnings is down on a percentage and actual basis this quarter, something necessary before there could be improvement.
It really is shaping up to be a tech phenomena when it comes to poor earnings. Companies from all industries have been affirming estimates or upping estimates over the past months. We have seen it in retail, education, chemicals, machinery, etc. There are areas and specific companies in tech that are doing just fine (e.g., ZRAN). The bulk of the former leaders are trying to adjust to middle age: they cannot run as fast, lift as much, and their hips are becoming rain gutters for their stomachs. Much like the nifty fifty from the 1970's, the bulk of these stocks will never, ever recover to their former glory. The rebound off of the September bottom may have been the last big moves for stocks such as BRCM and BRCD.
THE ECONOMY
New home sales up 5.3%.
Reversing January's big plunge, new home sales (about 20% of the home market) returned to prosperity with an 875K annual unit number. A good number and still defying a slowdown after a long housing boom, but below the 890K units expected. That explained some of the lukewarm reception this morning. The number is a little better than expected at the same time because January's new home sales were revised higher by 8,000 units, and that made February's rise a bit smaller on a percentage basis.
As will all numbers, you can look at them from many different angles to present the case you want. We prefer the bottom line: housing sales continue very strong. We have been very cautious on their ability to sustain the move, but even with rising rates, building permits are still increasing, and that means more units ahead. The big question: will they be able to sell them? Mortgage applications and refinancing have been dropping the past three weeks, a warning flag as to the strength of future sales. The consumer confidence survey as well indicated that the majority were not anticipating buying a home, new or otherwise, in the next six months. Thus, the hot pace may not continue.
The question is still how strong a recovery.
It is still a strong new home number, but a slackening trend will have an impact on that inventory rebuild that has been fueling the economic recovery. New homes impact a huge array of goods and services as buyers have to fill that house. That takes products and services. Inventories have been on the rise as companies rebuild next to nothing levels. A lot of those goods are slated to go into new homes as manufacturers bank on that continued homebuilding boom.
Will the consumer come to bat? The durable goods orders were up, but it was all airplanes (airplane orders up 41%). You cannot park a 737 in your breezeway (at least not at our house; you know, deed restrictions). The consumer has to step up to the plate and buy those goods. Computers, semiconductors and metals such as steel were very weak in the durable goods numbers.
Let's think about this. The consumer was supposedly feared by the Fed back in 1999 and 2000. At least that is what the Fed said. During one of the greatest expansions ever, consumers had the nerve to actually use the prosperity to consume those goods that were being produced. There was no inflation; supply was easily meeting the consumer demand. Supply (a.k.a., inventories) only started to pile up when the Fed cratered the stock market and dried up investment capital by sucking all money out of the economy.
Demand continued on its merry way, and the Fed was very lucky it did not spark inflation on its own actions. The CPI started to rise right after the supply side cratered because demand did not slack off. Look at WMT and other consumer retail providers; they did not really miss a beat during this recession as the consumer kept buying goods. It was the business side that died.
Then the Fed went from browbeating the consumer to courting the consumer, never missing stride. No one seemed to catch the irony of this (outside of this column). The Fed was worried about what it perceived to be the problem, but then discovered the real problem and had to then try to encourage the behavior it thought was the original problem.
What is the point? During all of this time, the consumer never really faltered. Home sales huge: record setting numbers during a recession. Auto sales huge. WMT, COST, ROST, KSS, BBY and all retail discounters: huge sales. The consumer never really dropped off. How, then can the consumer lead this recovery? We have said it before, consumers shopping at Wal-Mart are not going to require businesses to buy more servers at Cisco. Businesses had the ability to deal with that record consumer demand when times were good. Now that times are bad, they still have the systems in place to handle the same and even slackening levels of consumer demand. There is no incentive to replace those systems other than old age. If the money or incentive is not there to do so, they won't.
THAT is what is going to be the limiting factor in the recovery, not consumer demand. Business demand has to rise. It has to have something other than the steady pace of consumer demand that has been labeled a 'problem' and now a 'savior' for the economy. Our conversations with business buyers, surveys with purchasing managers regarding business spending, and statements of CEO's themselves say there is still no demand on the business side. Now some of that has to be mitigated with typical CEO cynicism regarding any recovery. We need to remember that the downturn was faster than any of these CEO's had ever seen (remember Cisco's Chambers monthly complaints about the speed of the downturn? Who can forget?), so they are gun shy about saying a recovery is here (very much the way brokerages and analysts all got really negative on stocks just about the time they were ready to turn higher).
Anyway, only half of the economy is really running, and that is the limiting factor on how strong this recovery will be. One side running, the other side shuffling along; you cannot even finish the company sack race with that action. It may take one to two years for the business side to start really humming. It will limp along and improve during that time, but unless the rest of the world starts surging, it will have a hard time taking off on its own.
Japan more confident?
Over the past three months there has been a lot of talk about Japan. Kind of stealth news that no one is really paying attention to. There was initial disappointment with the new administration not being able to make the big changes it had talked of, and then it was somewhat forgotten. Reports of a bit more consumer investment and reports of changing incentives to get the consumer to invest have been reported but not really noticed. Now we are hearing that small businesses are getting more confident that this activity might have a positive impact. Confidence made its largest one-month rise in 14 years and its third rise in four months. Right now it is nothing more than hope, but if businesses are more confident there is a greater likelihood that will pry open some wallets and start some private investment. Japan has already proved that government investment and spending does not stave off recession (I would call it depression in Japan's case); its only way out of its hole is with private investment. Encouraging signs, but far from fact. It is a very good sign for the U.S. if Japan can also emerge from recession.
THE MARKET
Another day of lethargy in the big indexes with the Dow leading the big three with a 0.7% gain. Volume was slightly lower, but as each day is below average, it is hard to gauge action off of the overall index volume. It is still clear that there is no heavy selling even on the down sessions, and there is still some mild accumulation ongoing.
The exception continues to be in the small and mid-cap arenas where we are seeing good moves after a few days of rest. The NYSE A/D line leaped back up to better than 2 to 1, indicative of the broad move even as the Dow and S&P tallied so-so finishes.
Put/Call Ratio (CBOE): 0.67; +0.01. With no major moves in the market, the option activity is not making major moves either. It is holding in the higher end of the range, meaning that puts are still a larger than normal percentage of option activity. This mirrors the short interest figures on the NYSE and Nasdaq that have both shown an increase over the past month. Short interest is also a contrary indicator; it usually gets higher as a down move or dull period in the market is coming to an end.
Nasdaq
Going nowhere fast, the index rallied from a lower open to close positive. It was not a lock as it once again had to rally from negative in the last hour. Still a poor pattern, still below down trendlines, and still struggling. As the big names confess more, it could find the road no smoother.
Stats: +2.58 (+0.1%) to close at 1826.75.
Volume: 1.624 billion (-2%). The past two sessions have shown the best volume on the Nasdaq in three weeks. Still below average, but encouraging to see the higher volume come in on up sessions. It needs the help.
Up volume: 841 million (down 19 million).
Down volume: 766 million (down 3 million). Almost no change in the volume breakdown.
A/D and Hi/Lo: Advancing issues led again at 1.24 to 1, almost identical to Tuesday's 1.28 to 1. No real broad move from the index.
New highs: 185 (+54)
New lows: 34 (-8)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Once again felt for 1800 on the low (1811.64) before managing to bounce higher. On the high (1832.01) it did not even challenge resistance at 1850. After breaking below 1850 it has been trying to establish a new range from 1800 to 1850. It is below the January down trendline now near 1895 and the even shorter term down trendline from the March top, now at roughly 1829. As noted Tuesday, the pattern is still pretty discouraging for the upside as it made a lower high after the tops in December and January and then broke some important support levels. It has made any recovery more difficult, almost insuring laggard status for the index if the rally in the broader market continues. Not all Nasdaq stocks are in the same situation. Remember, the index is priced mainly based on the biggest tech stocks. Thus its poor pattern is a reflection of their fallen status. There are obviously still many great stocks in the index.
Dow/NYSE
The best move of the big three indexes, crossing above 10,400 on the close. It broke below 10,400 on low volume, and today recovered it on stronger volume. As volume remains low overall, it is not a definitive move. It does keep it in the handle of its cup with handle that has formed this year.
Stats: +73.55 (+0.7%) to close at 10,426.91.
NYSE Volume: 1.156 billion (-5%). Volume was slightly lower on the second consecutive up session after the pullback. Still well below average. It has behaved properly during the consolidation, and the recent action suggests the shakeout we discussed earlier in the week. Next week will tell much more of the tale.
Up volume: 820 million (+140 million)
Down volume: 340 million (-170 million).
A/D and Hi/Lo: NYSE advancing issues looked much better at 2.04 to 1 (1.65 to 1 Tuesday). Once again the overall market is moving ahead, outpacing the big names.
New highs: 194 (+79)
New lows: 50 (-29)
The Chart: http://www.investmenthouse.com/cd/$indu.html
After testing 10,300 early in the week, the Dow moved back up into the range of its prior consolidation with a move back over 10,400. The low volume selling and overall good price/volume action suggests that a shakeout was truly occurring during the recent selling. The index remains in excellent shape to make a breakout move next week. That was the key we were looking for from this week: holding the line and being in position to move well when the big money returns to the market next week. It has to deal with its recent high at 10, 679 as its true test to move higher. At least it has set itself up to take a shot at it.
S&P 500:
Once again the big cap index mirrored the Dow's action (or vice versa) as the S&P rose for the second consecutive session on a bit stronger NYSE volume (though Wednesday's volume was lower). In the process the S&P cleared its 200 day MVA (1142.20) though it was unable to move over the next resistance at 1150 (1146.95 on the high). The action over the past week also suggests a shakeout of sellers, though the real test is again at 1175, a level that has turned the index back now four times since December with a pair of double tops. As with the Dow, it is setting itself up to at least give it a run.
Stats: +6.09 (+0.5%) to close at 1144.58.
Volume: NYSE volume was off slightly to 1.156 billion (-5%) and still well below average.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Thursday is the last session of the month and the quarter as the market will be closed on Good Friday. While there may not be a lot of trading action on the session before a three-day weekend, there won't be a lack of economic data. Final GDP numbers, Michigan sentiment, Chicago PMI, and personal income and spending are all out Thursday. We have seen the market pop up on good economic data, but there has not been the sustained buying all session to hold the gains in many stocks.
Tomorrow we would prefer to see the indexes just hold steady and set up for next week. The action though down before the past two sessions has been constructive overall as there has been no significant distribution on the selling. As we have said before, the majority of investors are holding onto stocks they have bought over the past month as evidenced by the lack of volume on the selling sessions.
The small and mid-cap indexes started their breakout moves ahead of the rest of the market, perhaps tipping the market's hand as to what is in store when the rest of the big money returns next week. Over the past two years we have come to hate the opens after holidays, but this time around we have an improving economic outlook. The success of the smaller issues is much more encouraging. Instead of having to look to the big name techs to bail out the market, investors are putting money in a broad range of stocks that are actually growing sales and earnings as the economy recovers. That helps provide a much more stable foundation for the market.
Today we saw many of our plays from these areas moving into buy points, and we see more heading that way. We won't know the real story until next week when volume comes into the market, but as we said, stocks from these categories are leading, and we are not going to wait until they are too extended; when they show the move we are initiating positions.
End Part 1 of 2
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