world stock market, us stock market

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6/1/02 Stock Split Report
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MARKET ALERTS
Targets hit Friday: SOV; CCRN
Buy alerts issued: SNS; INTU; FNF; ACXM
Stop alerts issued: RPM; CNMD; AMHC; AGN

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http://www.investmenthouse.com/alertssr.htm

SUMMARY:
- Early rally runs out of steam.
- Signs of recovery are very evident, and it looks to be picking up steam.
- Market still not acting as if there is economic recovery.
- Team Trades

Relief rally needs relief.

Very solid economic numbers helped continue the Thursday rebound. It would seem, however, that the big indexes had more success in two half sessions of gains than they can stand. All three reversed off of their mid-session highs and closed flat or solidly lower. The Nasdaq as usual looked the poorer for the wear, closing down 1% on rising volume. Its dominant tech stocks cannot catch a break as even better economic numbers still show tech is lagging the rest of the recovery (though there is improvement in tech spending as well). There are still too many mutual funds holding these stocks, and groups of funds continually use rallies to unload them. Thus the continued patterns that show distribution as opposed to accumulation.

The broader market held onto its gains as the NYSE A/D line was very decent. Moreover, the Dow held above the 200 day MVA showing a second doji at that level. Retail stocks came to life once again as did regional banks and savings and loans. These are economically sensitive areas that have helped lead the broader market higher even as the large cap indexes stumbled. Thus while the Nasdaq reversed on heavier volume and the S&P 500 tapped its 18 day MVA intraday and fell (18 day MVA is a resistance point in a continuing downtrend), there are continued signs of broader improvement even as the large cap indexes continue to struggle. It remains an overall difficult market, but continued improving economic data will continue to help the economically sensitive stocks outperform and give continued upside opportunities.

THE ECONOMY

Improving economic conditions were very evident in Friday's round of reports. The market was not totally sold on the numbers as the reversal indicates, but the numbers are piling up. Indeed, they are becoming impressive in some instances and pointing to an accelerating, not diminishing, recovery.

Chicago PMI further evidence manufacturing recession is over: 60.8
This is an important regional measure of manufacturing sentiment, and it is a good forecaster of the national PMI (the ISM) that will be released Monday. The Chicago number rose to 60.8 in May from 54.7 in April, its fourth straight month above 50, meaning that manufacturing activity in the region has been expanding for the past four months. The May reading is also a 3-year high for the region. That does not sound like a recession any more. New orders were a strong 65.6, indicating that there is even more improved activity to come.

Factory orders surge past expectations: +1.2%
April factory orders jumped to 1.2% when they were expected to gain just 0.7%. March factory orders were bumped up to +1.0% from +0.4%, further evidence of momentum growing steadily since the November -4.3% reading. Machinery orders (+4.5%) sported the best gain since March 2000; electrical equipment (+9.6%); computers (+3.0%). Business investment is recovering, something that an informal survey we conducted last week is surprisingly bearing out. What we are hearing from many businesses across the country is that many have decided that the economic recovery is going to last and improve, and they are acting now while they perceive prices as lower. This is not the majority mindset, but it is a change from just a one to two months back.

Productivity revision holds strong: +8.4%.
Q1 productivity was revised down from 8.6%, but it is still extraordinarily strong and still at 19-year highs. In Q4 it was up 5.5%. Strong and getting stronger as businesses get more out of their workers and take advantage of the systems put in place in the late 1990's and early 2000.

The unit labor cost portion of the report, watched as an inflation gauge (though labor costs in the real world outside the economist's ivory tower do not lead to inflation), dropped 5.2% (annual rate) after a 3.1% drop in Q4. Hours worked, however, dropped 2.1%. In a recovery you want to see hours worked rise as that means companies are demanding more of current workers as business picks up. That leads to hiring new workers. As the weekly jobless reports have shown, there is no pickup in hiring yet. In any event, if the Fed watches labor costs (and it does), it has another piece of data that says it does not have to raise rates anytime soon.

Michigan sentiment highest in 1.5 years: 96.9.
This sentiment indicator jumped sharply in May from 93 in April. Current conditions leaped to 103.5 versus 99.2 in April. Continued economic firming and reduced Middle East tensions were credited, but if that is the case, the tensions in the Indian subcontinent should impact sentiment negatively as two nuclear powers face-off.

Commodities index rises, prepared for breakout.
Whenever there is the hint of economic recovery or economic slowdown, commodities react quickly. These are the basic ingredients of economic output, and thus signals regarding economic direction impact their prices in a hurry. Commodity prices that peaked in late 2000 bottomed in October 2001 and were on a steady rise until April 2002 when fears of a much weaker than expected U.S. economic recovery, protectionist actions from the U.S. and others, and rising war tensions throughout the world sent them crashing. Over the past month, however, they have recovered and formed a bullish pattern. Friday's economic data pushed a solid advance, and it appears it will not take much to break the commodities index out of its current base and put it on the road to another solid advance. We view this as a major underpinning of the world economic recovery and of course the leading world economy in the U.S.

THE MARKET

Despite the very solid economic data, the market does not respond.

The early surge on the very solid economic numbers was later sold. Once again it appears as if the market is not buying into the recovery yet. It is no doubt discounting a recovery in some areas as seen in the economically sensitive stocks (retail, smaller financials), but for the market overall it still does not believe the recovery prospects warrant the current prices in technology and large cap stocks.

Is the market just missing the boat on what appears to be a solid economic recovery? We have discussed often in the past about the market being predictive of future events. As noted, it has been building in expectations of better economic times in the majority of stocks as the majority of stocks are not the largest in market cap. It is continuing to build in a worse future for many of the large cap names as discussed last weekend with the poor longer term charts for the Nasdaq and S&P 500 with their 5-year head and shoulders patterns. The problem most investors and market commentators have is realizing that the big names of the past usually do not lead the next market move. You often hear references to the 'nifty 50,' those stocks in the 1970's that attracted so much of the investment money. Polaroid, Kodak, etc. Not a pretty sight in the years that followed. There are always turnarounds in specific companies (can Dell do it as the clear leader in PC's?), but that is not the usual case for the biggest winners.

The big indexes are stuffed with the past winners because they were the best performers and attracted the most investment dollars from retail and institutional investors. Mutual funds are also stuffed with these stocks. As seen over the past two years, however, their earnings and sales have waned while many of the small issues have seen increased sales and earnings. Once future earnings and sales are perceived as being lower stock prices fall, and they won't rise until expectations about those future earnings and sales exceed current prices. By how much depends upon the market sentiment; right now sentiment is negative and thus investors are not willing to pony up much for higher P/E ratios. That is why we continue to see selling in stocks that are already 80% off of their highs; even at the lower prices the future earnings are simply not there. That is why mutual funds continue to dump those shares when opportunity presents itself (after decent rallies) in order to clear the decks to buy other stocks that might provide better returns in this new economy. That is that overhead supply we write about.

So what will it take?
Well, it is always about earnings. Peter Lynch is dead on the money when he says earnings drive stock prices. Sure there are always near term impacts such as the current Pakistan/Indian standoff that upset what should otherwise be a more positive market. Over time, it will be earnings and the earnings prospects moving forward. Prices rose ahead of Q1 earnings on expectations that the tech outlook had improved. It had not and there were no pervasive indications it was going to get better near term, so those gains were backed out. Tech may be a long way off still. Despite what you hear on the television, however, there are stocks already improving the bottom line, e.g., MIK (beat by 9 cents), KSS, DDS, and many other retailers. They are not alone in the market. The focus, however, is always on the large cap indexes and whether they are recovering.

So, it will take continued economic improvement, and more of what we saw Friday, i.e., solid and tangible evidence that manufacturing is really jumping to life and that business investment is doing the same. This week we will see auto and truck sales (our survey of dealers says May was a good month with continued incentives), construction spending and the big one, the national ISM (manufacturing). The employment is due out on Friday and that will receive media fanfare, but the market knows that is not the key. The consumer has been very strong even as unemployment climbs. That rate is only beneficial as far as telling us when employers start rehiring, but we will know that long before the monthly report comes out (and it is lagging anyway). Right now there are still layoffs being announced as IBM eased a 5,000 worker layoff on the market and NOK also said it was cutting. These are the big companies that just cannot grow the earnings fast enough to justify the big payrolls. On the other side, we do know that employers are planning on hiring more in Q3; we do know that staffing and outsourcing companies are busier right now.

We also know that profits are rising after a dismal Q4 showing. It is a combination of a recovering economy (tax cuts helped out more than anyone thought), increased productivity, and improved cost management (e.g., Cisco's operational 'home run' that was misread by the market, at least short term). The belief is that most companies have downsized and revamped operations as much as they can, and that gains will now come from economic growth. That is why there was the drop in stock prices after the Cisco earnings and everyone realized what they already knew, i.e., the real improvement ultimately had to come from the economy. We believe it is again starting an upswing in the reports. Remember how in 2001 the reports looked good early, tapered in May and June, then picked up again before 9-11? Ups and downs are natural in any trend. Even with that natural ebb and flow, however, the manufacturing sector keeps posting gains each month. Now they are improving again; we could start seeing some really strong economic reports. That puts us on the path for a good recovery in the second half after the dog days of summer and the usual market lull during that time. We do not discount a summer rally, but will have to see more signs of it building. Friday was not that day in our view.

VIX: 22.8; -0.34
VXN: 45.95; -0.62
Put/Call Ratio (CBOE): 0.73; -0.07

Nasdaq

Continued the move higher started Thursday but fell off the table when it hit the 10 day MVA near 1650. We expected more on the move but did not get it. War worries over the weekend perhaps, but the selling was on again an increase in volume showing more dumping into a very short rally.

Stats: -16.19 points (-0.99%) to close at 1615.73
Volume: 1.687B (+6.95%). Rising volume (though still below average ) .n a reversal from positive territory that turned to a 1% loss. This reversal is a day of distribution that followed on the heels of a much better volume up session. Those are particularly troubling for further upside action.

Up Volume: 415M (-409M)
Down Volume: 1.195B (+459M)

A/D and Hi/Lo: Advancers led 1.05 to 1
Previous Session: Decliners led 1.05 to 1

New Highs: 104 (+9)
New Lows: 94 (-39)

The Chart: http://www.investmenthouse.com/cd/$compq.html

Techs rallied up to the most minor resistance at the 10 day MVA (1653.17) where it flat out reversed on heavier volume. We were anticipating the down trendline (now at 1660) at 1665 and the 18 day MVA (now at 1666.46) to provide the turning resistance, but the rising volume shows that institutions took even this small rally over two half sessions as a chance to unload the big tech names as the NDX (Nasdaq 100) led the techs lower with a 1.6% loss. The very quick reversal from near-term resistance and the increased volume on that move is a clear indication that the big tech stocks are not ready to make a move out of this continuation of the downtrend. Pile on top of that the move occurred after a higher volume attempt at a bounce, and you have a classic failed bounce attempt fairly common in this market over the past two years. The big techs still have not been sold out from the looks of it.

Dow/NYSE

As with the Nasdaq all the Dow could muster was the 10 day MVA on the high before it reversed Friday. It managed to hold the 200 day MVA, however, so it may make another shot higher.

Stats: +13.56 points (+0.14%) to close at 9925.25
Volume: 1.226B (+0.08%)

Up Volume: 738M (+347M)
Down Volume: 473M (-361M)

A/D and Hi/Lo: Advancers led 1.57 to 1
Previous Session: Decliners led 1.14 to 1. Advancing issues continued to lead, even advance on the reversal, so the overall NYSE action was positive.

New Highs: 117 (+40)
New Lows: 40 (-20)

The Chart: http://www.investmenthouse.com/cd/$indu.html

The Dow gave back 112 points from its intraday high (10,042.26) to close basically flat. An intraday reversal as well, but able to hold onto support at the 200 day MVA (9888.68) on the close. Volume was lower, so it was not going to be a banner upside day even if it held the gains; more of the rally up to resistance that we expected. Still, we though it would also rally a bit higher on this move, closer to 10,100 or the 18 day MVA at 10,069.65. The candlestick chart showed a hammer doji Thursday, and Friday was yet another doji, both above the 200 day MVA. Though the reversal was not the anticipated move and in light of the continued recent struggles was typically bearish, the index could still rally from here in a continuation of the double bottom it is trying to form. Friday may just not have been the day for it to hold the gains with the continued India/Pakistan confrontation. As noted Thursday, if it is setting up a double bottom, it is still in the early stages and will have to clear 10,300 to breakout of the pattern. As of yet it has not made the move and Friday's attempt was a failure though not a serious high-volume reversal. It will have to beat the 18 day MVA and then the 50 day MVA (10,117.68) to overcome that 18 day MVA crossover of the 50 day MVA.

S&P 500:

The same pattern as the Dow, a hammer doji Thursday and then another shooting star doji Friday. Unlike the Dow, however, the S&P 500 is not at a support level of significance. It gave back 12.79 points from its high (1079.93) where it tapped at the 18 day MVA (1080.91) and retreated below the second March down trendline at 1073 (also the February lows at 1074). In one session it made the rally up to that near term resistance that acts as the ceiling in continuing downtrends. It then turned south after doing so. It may give another push up toward that level before rolling back lower, but unlike the Dow, there is no real support where it closed. Back in February when it formed a similar short double bottom, it hesitated a few sessions on the low before making a definitive move. The S&P may do that again as it showed its second doji and Friday's reversal was on lower volume than the spike on Thursday. The trend is still down, however, and it has already tested near term resistance. Upside is the path of most resistance.

Stats: +2.48 points (+0.23%) to close at 1067.14
NYSE Volume: 1.226B (+0.08%)

The Chart: http://www.investmenthouse.com/cd/$spx.html

THIS WEEK

Friday was an important economic day, and Monday will be likewise with the national manufacturing survey (ISM). It will be critical that the manufacturing sector on a nationwide basis show another expansion for May, preferably with a number higher than the 55 expected. If Chicago is a harbinger, it could very well do that. Auto/truck sales will also be out and as noted above, they should be solid.

A strong ISM would allow the Dow and to some extent the S&P 500 to attempt another move toward near term resistance as their action Friday was not unequivocally bearish. The key on any rally higher will once again be how the indexes handle near term resistance levels. We did not anticipate any significant move higher on this bounce, and any early rally will have to be viewed with skepticism until it can move over the middle of the potential double bottom patterns.

The Nasdaq again is the weight, the anchor chain, the hole in the boat. Technology reversed hard Friday and finished lower. That continues to hold the Dow and S&P back based on their technology components. We cannot look for sustained help from the Nasdaq, and that puts a limit or governor on any upward move in the other large cap indexes. It is hard for a market to rally that is bifurcated. We expect the Nasdaq to continue to struggle and work its way lower, and that will have a negative impact on the Dow and S&P 500 in the event they do try one more push higher on some good ISM news.

Friday saw a recovery in retailers and regional banks. Even if the big indexes are not able to make a sustained move up on a strong ISM report, as we saw Friday, good economic data continues to help the smaller economically sensitive stocks. These were just recently struggling on the fears of slower economic recovery and how world events would impact that recovery and continued consumption. The renewed vigor in the economic reports helped send these stocks higher once again, doing so on strong volume. To us that indicates continued upside is available in these sectors that have been showing excellent gains ahead of the large cap stocks and indexes.

End Part 1 of 3

world stock market
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