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us stock market, trade stock
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8/31/02 Investment House Daily
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HAPPY LABOR DAY!
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MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: None issued
Trailing stop alerts: None issued
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SUMMARY:
- Slow, slow, slow before the long weekend.
- Chicago manufacturing improves, consumer spending strong, sentiment not diving.
- Stocks and indexes at rally points, but pre 9-11 will there be an incentive to buy?
To be conservative you could call the action subdued. The Nasdaq just edged over 1 billion shares traded, and we heard that was only because a broker accidentally hit the 'buy' button as opposed to the 'sell' button on a trade in the last two minutes.
There were individual stories such as BLL making an acquisition that shot it higher on big volume, but most of the action was late summer slow. The Mississippi river and the stock market both run like molasses in the summertime, and that is especially true this year with the 9-11 anniversary on Labor Day's heels. On top of that is September itself, historically the worst month of the year for the stock market. The action this coming two weeks will certainly be interesting with yet another set of unique circumstances for investors to face.
THE ECONOMY
Friday closed out a mixed week economically. Fittingly, the reports were mixed, but on balance Friday's news was positive.
Personal income down, spending strong.
In the 'so what's new?' category, consumers continued to consume with a 1.0% gain in July after a 0.5% gain in August. Durable goods spending was up 3.7%, the largest increase since October 2001. At the same time, personal income fell 0.2% for July, the lowest level of income gains/losses since (again) October 2001. At some point consumers would run out of money and credit at this pace, but that is what is said year after year.
Michigan sentiment 87.6 versus 88 expected and 87.9 prior.
That was high enough that the market let out a big sigh of relief. It did not race higher, it just let out a sigh of relief and did not tank. As with the Conference Board reading earlier in the week, the sentiment numbers indicate that consumers are, relative to past recessions and the aftermath thereof, in rather good spirits. The concern is that slowing sentiment will lead to slowing consumer demand and a double dip.
As noted previously, however, there is not a lot of correlation between confidence and spending until it does get down to those really low levels in the 40's and 50's. You know what has happened at that point? Unemployment is very high (not at the relatively mild levels we have now), many people are out of work and just don't see the prospects as good for finding employment. We said it when the Fed was supposedly fighting the 'runaway consumer' back in 1998 and 1999: consumers consume and they will consume until they lose there jobs. What did this last recession show us? Consumers will continue to consumer with unemployment at 5% and higher. Again, it takes a lot of consumers out of lots of jobs to take consumption down to levels that really harm the economy. With the baby boom generation sending kids to college, buying second homes, renovating primary residences, buying motor homes, etc., the consumption curve is still up for several years ahead, enough to take us out of this recession.
Chicago PMI sparks higher at 55.8 versus 52 expected and 51.5 prior.
August Chicago business sentiment improved, indicating that the manufacturing slump may be ending. Why? Chi-town's numbers are considered a good proxy for the national number that is going to be reported Tuesday. Remember, any reading over 50 shows expansion, and the fact that it appears to have bottomed above 50 is very good indeed. Prices paid fell as the index rose, and that puts more profit in the bottom line for companies. Employment is still lagging, down 3.5% from the July reading, and that was some sour in otherwise sweet numbers. Overall, however, the Chicago numbers were a welcome indication that once again all of the hand-wringing over what have been very decent economic numbers may have been for naught.
THE MARKET
Time for an overall look at the jump-off point for the rest of the year.
We proposed a month back that a great scenario would be a rally through August and into September, then selling in September to October that brings a test of the July low. That simply follows a historical pattern with September being the worst month for stocks and October providing the bottom after all of that selling. The rally upside was not as far or quite as long as we wanted, but it was not bad (about 20% and almost to the end of August); there is certainly enough upside built in for a downside test if history and September hold true.
One problem with that is that it is almost too pat. While not everyone is looking for a test of the July lows, a lot are. There is a lot of talk about that after the Dow and S&P 500 stalled out at some resistance points. We also note, however, that while the 1974 bear market provided a double bottom pattern, i.e., a test of the lows, many other bear market bottoms did not; they just hit a low and then worked their way off of that level, building and consolidating, building and consolidating.
Not strong, not terribly weak.
At this stage of the game the current market is not showing that it is necessarily going to roll over. Volume on the upside rally was less than spectacular, but then again, the crescendo in volume during June and July skewed average volume higher; the current volume matches the average volume before June and July. While some stocks are struggling after breakouts, others continue to move higher and higher, rallying, then testing near support before rallying further. There has been some distribution, but not heavy dumping of shares yet. In short, the upside action is not great and leaves us really uncomfortable, but the downside action has not resumed with ferocity.
That could start this week as more fund managers get back to business, but the market thrives on worry. The put/call ratio has been up in the 80's and the 90's late in the week. Bullish advisors, however, moved solidly ahead the past week. Offsetting signals of sentiment work to cancel each other out to a certain extent. That leads you back to the recent action showing some distribution and about 50-50 failed breakouts. That is the start of a recipe for trouble, and if this week opens up with some heavier selling, closing upside and expanding downside positions is in order.
Getting a bit sold out?
There were some interesting aspects Friday. NVLS said its Q3 would stink, but the stock gained fractionally on the session. The SOX is back at 300, a support level that it is not giving up lightly. The action in NVLS and other chip stocks Friday could suggest that the chips have absorbed all of the bad news at this point. Further, the Dow and S&P 500 are hanging onto their July uptrends. The Nasdaq is holding above support at 1300. After a move higher, the testing of support and holding up in what has been very pessimistic circumstances is not bad action. These pullbacks test the patience; after the move up it was a frustrating week seeing the indexes unable to work higher, unable to capitalize on some decent economic news.
Those are good signs of consolidation, but the real game starts this week when there should be more institutional managers back at work. Hanging on at support can be good during times when the entire market is playing, but in the dull days of summer ahead of 9-11 it may just be a really weak market struggling to hang on; when everyone is back in the game the slipping grip on the support levels may give way.
All things considered, we still have to go with the 'pat' scenario: further selling in September. We don't like the action in breakouts, the distribution in a quiet market, the time of the year.
Sentiment Indicators
VIX: 35.8; -0.52
VXN: 54.98; -0.07
Put/Call Ratio (CBOE): 0.82; -0.10. Put/call ratio remains at high, backing off on the attempted rally for most of the session.
Nasdaq
Up down, then down on the close on very low volume. A very mild session marking time. Holding above 1300, but the real test of 1300 comes this week.
Stats: -20.92 points (-1.57%) to close at 1314.85
Volume: 1.092B (-23.6%). No volume to speak of.
Up Volume: 223M (-816M)
Down Volume: 857M (+493M). What volume there was turned up on the downside as the Nasdaq was lower most of the session.
A/D and Hi/Lo: Decliners led 1.13 to 1.
Previous Session: Advancers led 1.37 to 1
New Highs: 32 (+6)
New Lows: 64 (-36)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Really no action on the session. It was unable to make it up to the 18 day MVA (1344.43) on the high (1337.92) and then late session selling took it down to close near the low. Two shots at the near term resistance failed, and now Nasdaq is faced with some pretty stout overhead resistance at the late July high, the October 1998 bear market low, the March downtrend, etc. when more investors return this week. 1300 is its thread of life; if it breaks that it moves to 1275 and then 1200 (not all in one move of course). Looking at the chart, the path of least resistance is down.
S&P 500/NYSE
Another doji as it holds right at the July up trendline, trying to find footing.
Stats: -1.73 points (-0.19%) to close at 916.07
NYSE Volume: 897.745M (-23.48%). Light volume, no surprise.
Up Volume: 460M (-125M)
Down Volume: 428M (-125M). Dead heat in volume, reflecting the price action.
A/D and Hi/Lo: Advancers led 1.31 to 1. Advancing issues still managed to lead.
Previous Session: Advancers led 1.32 to 1
New Highs: 60 (+18)
New Lows: 28 (-8)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Showing another very tight doji (open price and close price within 0.42 points of each other) right at the July up trendline (Tuesday that will be at 922). A doji after selling can mean a shift in momentum back to the upside, but starting Tuesday there are other factors at work, namely more investors of all sizes back from vacation. That changes the field from last week and its very light volume. On the positive the S&P is still over the late July and early August highs in the ascending wedge, showing the doji patterns right on top of those levels (911.64; 908.64) that should act as support if the index is going to continue its move higher.
Dow:
Stats: -7.49 points (-0.09%) to close at 8663.5
Volume: 897.745M (-23.48%)
Similar to the S&P 500 with a doji just below the July up trendline (now at 8740 at the open Tuesday). It must deal with the 18 day MVA (8743.97) and the 50 day MVA (8856.94) and then 9000 where it turned back recently. It is still showing indications of a move higher, but as with the S&P 500, with the return of the entire universe of investors Monday, the playing field will be altered.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
Another full slate of economic news crammed into a shorter trading week. Tuesday the ISM (national manufacturing index) is the first big report of the week. Thursday there is ISM services, Q2 productivity, and factory orders. That is the lead in for the highly touted employment report that shows a very nice view of the past. It is a closely watched historic record, however, so it is important. Expectations are for slight favorable increases across the board.
That is the backdrop for the real story of what happens when everyone gets back to work and starts deciding if they want to be in or out of stocks. The rally has been a nice one up off the lows (that 20%), and it is trying to consolidate the gains but is faltering as the Dow and S&P 500 have shown three distribution sessions the past two weeks. Though it may be the pat move, we are concerned about more downside in the coming week as the faltering turns to harder selling.
As always we let the market show us, and that will be a break of the trends by the Dow and S&P 500, a breach of 1300 by the Nasdaq. Again the SOX is at potential support at 300 after being knocked back down to near its August low (283.91), and it acted a bit Friday as if it has priced in the bad news. There are indications the market could move up still, but they are rather faint at this point. We are preparing for further selling.
That means if there are breakdowns in the indexes we will close out upside positions that are breaking down or not recovering, and we will also lock in gains on those stocks that made recent moves upside in defiance of the market. We will also let current downside positions run and consider new downside positions as well. On a breakdown we will play that move and then watch for signs of bottoming near the prior lows.
Support and Resistance
Nasdaq: Closed at 1314.85
Resistance: The late July high (1354.48) could provide some resistance. The 18 and 10 day MVA (1344.43 and 1346.66, respectively). 1357.09, the October 1998 bear market low. The March/May downtrend line at 1378. The 50 day MVA (1380.58). 1418, the interim test after the September low. The August uptrend line at 1426. There is another downtrend line from the March and May highs at 1449. That is followed by price resistance at 1500.
Support: Price support at 1300. Some support at 1275. After that, the July lows at 1240 to 1230. Price support from 1190 to 1200 (the July intraday low is 1192.42).
S&P 500: Closed at 916.07
Resistance: The 18 day MVA (922.23). The 50 day MVA (934.91) is some resistance. The September 2000/May 2001 downtrend line at 943 along with 950. 965, the September 2001 closing low. The next downtrend lines from March and April highs at 963. Then 1000 is psychological resistance.
Support: The July up trendline at 918. The top of the wedge at 911.64. The March down trendline at 909. 850 to 855 has previously held (the October 1997 and Q2 1998 lows). The lowest channel line in the March downtrend channel (836). 800 is next. Then the July low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8663.50
Resistance: The 18 day MVA (8743.97). The July uptrend line now at 8740). The late July high that is the top of the ascending wedge at 8762.14 (8745 closing). The 50 day MVA (8856.94). 9000 is key on up to 9050. A range of resistance from 9000 to 9500, but specifically 9250 and then 9500.
Support: The March down trendline at 8600. The September closing low at 8235.81. The lowest bottom channel line of the March downtrend (8190). 8062, the September 2001 intraday low, has tried to hold on a couple of occasions. Then the July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
9-03-02
Auto sales, August: 6.2M expected, 6.5M prior.
Truck sales, August: 8.0M expected, 8.1M prior.
ISM national, August (10:00): 51.8 exected, 50.5 prior.
9-04-02
Construction spending, July (10:00): -0.4% expected, -2.2% prior.
9-05-02
Initial jobless claims (8:30): 395K expected, 403K prior.
Q2 Productivty, revised (8:30): 1.1% expected, 1.1% prior.
ISM services, August (10:00): 54.0 expected, 53.1 prior.
Factory orders, July (10:00): 4.7% expected, -2.4% prior.
9-06-02
Non-farm payrolls, August (8:30): 47K expected, 6K prior.
Unemployment rate, August (8:30): 5.9% expected, 5.7% prior.
Hourly earnings, August (8:30): 0.3% expected, 0.3% prior.
Average workweek, August (8:30): 34.2 expected, 34.0 prior.
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TEAM TRADES and SUBSCRIBER QUESTIONS
Gave the staff an early break.
End Part 1 of 2
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