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us stock market, top stock pick
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12/07/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: SFNT (bonus)
Trailing stops issued: MXIM
Stop alerts issued: WGO
We issued a general alert on the employment report Friday as it was so far off of expectations and had really tanked the futures.
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
QUOTE OF THE DAY: I don't make jokes. I just watch the government and
report the acts.- Will Rogers
SUMMARY:
- Market recovers from a series of surprises with a bounce off the 50 day MVA.
- Employment lags still.
- O'Neill forced out. That is good, that is bad.
- After a week of consolidation, a heavy news load, and a 50 day MVA test, indexes poised to recover.
- Subscriber Questions
No jobs, no Treasury Secretary, no chief economic advisor, yet market recovers.
There was a lot to digest. Jobs, typically lagging in a recovery, are still showing no signs of following the modest upturn in economic numbers. In fact, they appear to be blundering off on their own path as businesses are still reluctant to hire. Layoffs are slowing, but that has not made the turn to hiring. Then the Treasury Secretary 'resigned,' but it was in reality a push out the door. Thirty minutes later the chief economic advisor announced he was out as well.
It was a lot to get a handle on, and at first the market could not get a grip. The major indexes dropped quickly to the 50 day MVA. At that point the jobs data was accounted for (it is a lagging indicator) and the idea that O'Neill was leaving was not bad as he had been openly vocal that the economy was fine and that no additional stimulus was needed. With the mixed-message king out of the way the administration can actually get everyone on board for a real stimulus package aimed at getting the second half of the economy functioning, i.e., the business or supply side. If that is done we can deliver 4% growth in 2003.
The market seemed to get the message and recovered off the 50 day MVA. The Nasdaq rose 0.8% on slightly higher volume, leading the pack higher. Modest gains but a turn to positive in the A/D line as the indexes tested the 50 day MVA and bounced a bit. This is what was expected for the session. And after a week of selling puts the major indexes and many stocks in good position to bounce after a good pullback from the nice gains.
THE ECONOMY
Jobs report a stinker.
Unemployment rose to 6% (plus two as discussed below), returning to its March level and equaling the highest reading in 8 years. In a way that is a victory, moral of course. The jump was more than expected. What was worse was the non-farm payroll number that tanked 40K jobs versus adding the 40K to 50K expected. Businesses definitely were not in the hiring mode yet.
Manufacturing continues to stink, losing 45K. Retail lost 39K while services added 50K. October was better than expected, November was worse than expected. The only bright spots had pretty dim bulbs. Hours worked rose and were up 1.1% year over year; some improvement. Also, there have been upward revisions the past 5 months in the data. That typically indicates a turn is coming in the data. As employment lags the rest of the economy, this makes quite a bit of sense.
Unfortunately, investors were looking for an upturn and they wanted it now. They did not get it. It is, however, coming, and if the administration can now put together a solid incentive package that focuses on developing the supply side, it will be here sooner and stronger than expected.
O'Neill is out. Necessary but disappointing.
A lot of potential, a brilliant CEO, a visionary, no politician. O'Neill was not cut out to be Treasury Secretary, at least not in the real world. He spoke his mind and was blunt; in the tap dancing act that is Washington that did not play well. He was not bothered that much with the day to day economic moves, instead looking at the big picture and several years ahead. That too did not fit D.C.; in D.C. the focus is on the next election. O'Neill saw that the economy would recover over the next two years and more, that the foundation was in place, but that was not soon enough. We did not and do not think it can reach its potential without help, and we are very happy the administration is putting that as priority focus. With O'Neill there, the mixed message just made the push through Congress harder. As one critic put it, an O'Neill press conference was like watching a child play with a loaded handgun. You just never knew what he was going to say.
He will be missed, however, in that he was a visionary of sorts, looking to improve the system so everyone could take part in the American Dream as opposed to maintaining the status quo and growing the government. One of his goals this coming year was taking on tax reform, scrapping the current system and replacing it with a national sales or usage tax or a VAT. Sure it would be a colossal struggle, but it has to start at some point, and what better point than the head of Treasury, the department that oversees the U.S. version of the SS, i.e., the IRS. Whoever takes his place (Phil Gramm, Dick Armey?), we all need to pressure him or her to maintain focus on the big picture and not only the next round of elections.
THE MARKET
Things did not improve, at least not at the open, and the indexes made that quick run down to the 50 day MVA. After a slight undercut that made things 'interesting' (we purposefully disregarded the undercut, anticipating a recovery but ready if it turned out to be otherwise), the indexes turned back up. It was a modest turn, but it was a necessary recovery. It was not a session that clearly signaled the pullback was over and wine and roses were ahead, but the indexes did what they had to do given where they were.
Looking at the index patterns, we still like what we see for the most part. The Dow, SP500, SP600 look pretty good. The Nasdaq is, well, still in the uptrend but right at the August high. It has been the leader, and it has a test ahead of it as it is at the August high and still has the 200 day MVA after that. Key stocks, however, held support and were actually on the way back up Friday. That is a positive sign for another bounce ahead as the indexes make moves very similar to the pullback in early November, i.e., a tap of the 50 day MVA and price support at the same time. While the action is not textbook strength, contrary to the pessimists, the action remains positive.
What is the situation? Economic news still remains steadily improving. Sure the employment report was disappointing, but with jobless claims just starting to turn in the past month it was too optimistic to think companies were hiring. Business spending is just starting to improve though it is improving. The market had moved ahead of the economic numbers really showing improvement and kept on moving as the better news started to break. Last week it had all the good news it could stand and was ready to pullback. Besides the economy-lagging employment report and some misinterpreted November retail sales, the economic data is very positive. There is going to be some stimulus passed and it promises now to be even broader, something that will really help stimulate the economy. The background has really not changed, just that stocks have let out some of the air from the last leg of the rally just as they did back in November before they started moving back up.
Sentiment Indicators
VIX: 32.68; -1.6
VXN: 52.28; -1.88
Put/Call Ratio (CBOE): 0.91; +0.02. Moving up a hair even as the market recovered to close positive. Four sessions at 0.89 or higher. Investors still remain skittish of this rally. As we have discussed several times in the past two months, continues distrust of the rally keeps plenty of fuel for the fire down the road. No quick blaze and then flameout.
Nasdaq
Nasdaq did not reach all the way to the 50 day, but as in November's test checked up above that level and started back up.
Stats: +11.69 points (+0.83%) to close at 1422.44
Volume: 1.538B (+4.48%). Volume edged up on the reversal and move positive. That is what you want to see, but volume was still well below average. There were not a lot of buyers in the market.
Up Volume: 967M (+560M)
Down Volume: 502M (-528M)
A/D and Hi/Lo: Advancers led 1.16 to 1. Keeping modest during this entire pullback other than that -2:1 day on the Tuesday selling. That is a good sign, along with the good price/volume action, that the pullback was not undermined by institutional selling.
Previous Session: Decliners led 1.56 to 1
New Highs: 42 (-23)
New Lows: 24 (+2)
S&P 500/NYSE
Tapped just below the 50 day MVA on the low, tapping at price support from the October consolidation and turning positive on the close.
Stats: +5.69 points (+0.63%) to close at 912.23
NYSE Volume: 1.231B (+0.72%). Marginal gain in volume, not enough to make a difference, as volume continued to be well below average.
Up Volume: 736M (+392M)
Down Volume: 486M (-394M). The selling was not really intense as the up/down volume ratio indicates.
A/D and Hi/Lo: Advancers led 1.59 to 1. Not bad, again showing the selling was not intense.
Previous Session: Decliners led 1.45 to 1
New Highs: 31 (+8)
New Lows: 15 (-2)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps continued down, tapping just below the 50 day MVA (900) on the low (895.96). That level corresponds to the top of the October consolidation (899). So, what we have is the index tapping the 50 day MVA and a solid price support level and bouncing up. It was no definitive, flashing light, 'here I go back up' red flag, but it was enough. The move back up in November started on a low volume gain. It needs to get back over that early November high at 925, but that is nothing new; the index had been in a long downtrend before this rally and has a lot of overhead to manage.
DJ30:
Touched the 50 day MVA (8517) on the low and snapped back sharply to close positive. That low also marked (roughly) the October high (8547) that is also price support. Volume edged higher but did not give a good bump up on the reversal. Friday, Iraq disclosure, pick your reason, volume was lower. As with the November test, it tapped the 50 day MVA and rallied back. That is a higher low that maintains the uptrend. All it needs it to put together some volume on the move up.
Stats: +22.49 points (+0.26%) to close at 8645.77
Volume: 1.231B (+0.72%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
Iraq gives its list of weaponry this weekend but we doubt there will be anything definitive coming out. From what we hear, it is very, very lengthy and is in Arabic. It will take a week at least just to get the thing translated. On top of that it is a relatively light economic week other than November retail sales. We already know what they will look like, however, as retailers were letting the numbers out earlier last week.
Bottom line it looks to us as if the market has made its pullback and is ready to start back up. There are not a lot of believers in the market among 'ordinary' investors, and that is typical at important market turns. We discussed it before, but the average investor becomes a non-investor after a long bear market, and he or she won't get back in the market when it is time. They have been burned and don't trust the market and don't trust their old broker that they used to talk to at least weekly. There is a defense mechanism where they tune it out, convinced that it is a fool's game based on their most recent experience. They end up missing out on the early moves because they refuse to accept that the market is the place to make money. Many are chasing the last big move in bonds just as they chased the tail end of the move in stocks. They are not looking ahead but chasing gains already made. That is sad, but it helps the rally and is an indicator that the move is still young.
This last pullback is much like in October and November when the pullback brought out a lot of negative talk. During those pullbacks there was a lot of talk about a technical market breakdown and how weak the economy was (double dips and Greenspan's 'soft patch'). Just when one of the big brokerages came out and said the market was in that technical breakdown it started back up (we are not sure what technical indicators suggested that; ours said the opposite and we said so).
This pullback is similar. There was talk of the technical breakdown early in the week when the Nasdaq broke its up trendline from the October low. There were valuation concerns and valuation downgrades (same story as before: economic numbers cannot support the valuations). The put/call ratio has jumped back up during the selling. This looks just like the same thing to us. The market ran up after a pullback and is now pulling back to consolidate the last move with good price/volume action and a good increase in contrary indicators. It is so engrained in many market analysts to be pessimistic that it appears they cannot or will not look at what the market is doing.
We look at the market and what it is telling and we look at the actual economic stats and what they are telling. If they look up, we take it at that. If they look down, we do the same, trying to keep our emotions out of it. Right now we see the same pattern. Polly Anna? Too optimistic? We just call it based on what the market numbers and the real economic numbers say. The idea that this is just a bear market bounce is totally plausible, but it was also totally plausible to say that stocks were wildly overvalued starting in 1995 or earlier. If you did not act on what the market was telling you, however, you missed out on huge gains. Gut feelings that this is still a bear market bounce and that the economy will tank are fine, but you cannot ignore what the market id doing now.
That was a long way of saying that we are looking at more upside this week. We dabbled with a position or two late in the week last week, starting to build some positions for the next move. There are many stocks that held support and are ready to move back up this week along with good patterns that formed up during this pullback. As we said a month or so ago, that is how it works: the leaders rally early and consolidate, and when they do other stocks complete their bases and prepare for the next move higher. The pullback was again nerve-wracking, but we see a lot of stocks that were putting the finishing touches on their bases during this pullback.
Support and Resistance
Nasdaq: Closed at 1422.44
Resistance: The August high at 1427. The 18 day MVA at 1425. The 10 day MVA at 1438 may be some resistance. Price resistance at 1500 and the 200 day MVA (1487). 1574, the May low, is next.
Support: 1400 is soft support. The 50 day MVA (1370). 1357.09, the October 1998 bear market low. July, August, and September interim highs at 1345.
S&P 500: Closed at 912.23
Resistance: The 18 day MVA (915). 921 is some price resistance. The November high at 925.66. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: As noted, the July, August and September interim highs at 909 to 911 had not been totally broken. The top of the late October consolidation range at 899. The 50 day MVA (899.86). The September 2000/May 2001 downtrend line at 862. The March down trendline at 850. 850 to 855 (the October 1997 and Q2 1998 lows).
Dow: Closed at 8645.77
Resistance: The 18 day MVA (8675). The late July and early September interim high at 8726 to 8762.14 (8745 closing). The 10 day MVA (8717) is possible resistance. Top of the July, August, & September interim highs at 8762. The early November high at 8800. A range of resistance from 9000 on up to 9050.
Support: The exponential 50 day MVA (8517). The October high at 8500. Then 8250.
Economic Calendar
12-10-02
Wholesale inventories, October (10:00): 0.2% expected, 0.5% prior.
FOMC meeting (1:15)
12-12-02
Current account, Q3 (8:30): -$135B expected, -$130B prior.
Retail sales, November (8:30): 0.3% expected, 0.0% prior.
Initial jobless claims (8:30): 393K expected, 355K prior.
FOMC minutes, November (2:00)
12-13-02
PPI, November (8:30): 0.0% expected, 0.1% prior.
Core PPI: 0.0% expected, 0.5% prior.
Business inventories, October (8:30): 0.1% expected, 0.6% prior.
Michigan sentiment, December preliminary (9:45): 85.0 expected, 84.2 prior.
End part 1 of 3
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