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us stock market, stock watch
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1/07/03 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: PFGC
Buy alerts issued: AVCT; SAFC; VRTY
Trailing stops issued: None issued
Stop alerts issued: WGO; MLHR
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Market sluggish after the big Monday rally
- Economic numbers still dragging as Bush outlines expanded economic program.
- Nasdaq clears the August high, but could not pull the Dow and SP500 with it.
- Subscriber Questions
Investors look to dividend stocks and some techs.
The 100% elimination of dividends had investors looking at the big stocks sporting big dividends and speculating on big tech stocks that might offer dividends if the Bush plan is passed. That focus kept the move very narrow as opposed to Monday's broad surge. Outside of those stocks, some techs had good sessions on the heels of positive earnings warnings from the likes of MERQ and EMC. Outside of those stocks there were not many upside movers.
The buying was enough to push Nasdaq over the August high at 1427 on rising, above average volume. That is a major move, but it still has the 200 day MVA to clear on this run. With the Dow and SP500 balking at resistance, it is not a sure bet. Basically the market feasted Monday on the prospect of stimulus and then dealt with the hangover today. The fact that it did not sell off had some traders feeling good, but the action near resistance in the big indexes was not all that pleasing to us.
THE ECONOMY
December factory orders -0.8%, -0.7% expected.
After the fall in durable goods sales, economists lowered expectations for factory orders. Down but better than November's -1.5% (-1.4% originally reported). This is indicative of the continued manufacturing recession. Now some will say that the recent ISM number showing expansion in that sector debunks these other reports. As usual, it is all relative. Sure manufacturing expanded, but the sector has been contracting for so long the fact that it expands for a month does not erase the losses. If you have $100 and lose $50, gaining back $5 is not that big a deal. The monthly factory orders and durable goods orders show the year over year and sequential moves, and thus give you perspective. The ISM does not do that but simply measures whether there is expansion or contraction without any reference points. In short, the manufacturing sector is showing signs of life but it is that old case of a comatose patient twitching and murmuring a bit; a very significant development, but far from getting up out of the bed and walking.
Bush stimulus package styled more as long range economics versus stimulus.
The Bush plan and democratic plan overlap on some points with the Bush plan providing some short term stimulus but more longer term structural economic help as opposed to democratic focus on the demand side. In other words, the democratic plan views the need for stimulus as a band-aide to help get over an economic rough spot in an otherwise sound system. The republicans view the need as a short term shot of vitamins for an already improving economy and then longer term changes in the system to provide the landscape necessary to insure continued future economic expansion. As usual the fight will center around the ideological differences.
Even on some of the overlapping provisions you can see the differences. The section 179 deduction will be increased $50k to $75k depending upon the plan. As noted last night, that does nothing for inducing small businesses to spend by itself. The Bush plan does add the incentive of suspending the Alternative Minimum Tax for those businesses taking advantage of the increased expensing. That is a true carrot; if you have too many deductions you are tossed into the AMT and have to pay what the IRS considers the 'minimum fair tax' for a person or company making what you make. If buying and expensing equipment would put a company into that AMT, it won't do it. Suspending the AMT does offer an incentive those companies. Not as great as a tax credit, but it is an incentive. A real incentive for everyone would be to eliminate the AMT altogether, but a Congress that wants to raise your taxes before it will cut one penny of its own spending is not one that will permanently give up a cash cow such as the AMT.
The plan was hailed as a boon for investors, small business, and the market. It was panned (as usual) as a giveaway to the rich. In a country that was founded on the ideals of individual liberties and rising to the top based on your own determination and ingenuity, it would seem to us that everyone would jump at the chance to get the government out of their pockets as much as possible and let individuals decide how to put their money to use with respect to business, charity, medicine, etc. Regardless, the one argument that really sticks in the craw is what many ivory tower types keep repeating: with projected 3% to 4% GDP growth this year, why are we even talking stimulus?
Want to know why? Here is why. The economy was humming along just fine as it continued the economic expansion that started in the 1980's with the tax and business incentives that poured billions into investments in U.S. business and technology. The huge economic boom that started back then led the USSR to economic ruin as it could not keep up with the U.S. When the cold war ended, billions of dollars were freed up, generating the massive surpluses of the 1990's. Congress saw our bounty before it and quickly spent all of our money. The economic boom continued, and those in charge started to worry about when it would end lest it be on their watch and get blamed for it. The long prosperity where they could just sit back and watch made them cocky; it made them think they made it happen and that they could control its direction. They dusted off their ancient Phillip's Curve economics books to try their hand at managing the growth that they thought was getting out of hand. We heard phrases such as 'irrational exuberance', 'runaway consumer,' 'market mania', 'white hot economy.' Epitomizing the cavalier air, one Fed governor flatly said unemployment had to rise. Taxes were raised. Interest rates were hiked again and again with increasing intensity as the Fed thought it could slow down the economy and provide a 'soft landing', something that it had been unsuccessful at engineering since the central bank's inception.
What it did was crash the stock market, which as we realized at the time, was just the forewarning of an economic shutdown to come. Millions of Americans lost trillions of dollars in retirement savings. 3.5 million Americans now collect unemployment, and that does not count those that long ago fell from the rolls. Thousands upon thousands of small businesses no longer exist. We are looking at millions of baby boomers with no retirement savings as a result. Don't need stimulus??? If we don't do something, the few hundred billion dollars the democratic leadership disingenuously wrings its hands over will be mere chicken feed when these boomers retire with no money to pay for housing, food, medicine, etc. It would have been bad enough for the economy if they had held onto their gains and simply retired because one of the major consumption generations in the entire U.S. history went to pasture. As it is now they will be a burden that will bankrupt the country if there is not major economic growth in the next five years.
Thus it is imperative, absolutely imperative, that the economy gets back to humming rapidly and not labor through a slow, drawn out recovery that comforts economists too preoccupied with inflation fears (inflation that did not, mind you, show up at all in the 20 year expansion). We have 10, maybe 15 years to get these people back up to retirement readiness or else face the prospect of having the largest welfare class in history trying to live off the labor of fewer and fewer workers. Welcome to Sweden of the 1980's and 1990's and a socialist state with taxes so high it cannot get anyone to work and the favorite winter pass time is figuring out who will be the next to load up the family pistol (I can make fun of Sweden because that is where a lot of my descendants came from).
The point: the government made most of the horrendous decisions that ruined our prosperity, and if it is not fixed rapidly we are condemning to a miserable existence those in retirement now and nearly in retirement that lost their futures because of that government action. Then there is the next generation that will bear the burden of paying for those without means to pay for themselves. It is an ugly picture. That is why we harbor a lot of anger over what transpired the past 5 years as we could see the same errors being made as if it was a slow motion car crash. The hesitance to correct that which was intentionally broken (though the end result was most likely unintentional, at least for most involved) is infuriating to us and it should be infuriating to every citizen in the country from those whose families were here originally to those who came here decades or centuries back to those that are just arriving and looking for the opportunity to use hard work and ingenuity to make their own freedom.
THE MARKET
Breadth dries up as indexes churn near resistance.
Investors were not interested in a wide array of stocks Tuesday. Breadth was poor, and as a result the indexes struggled at resistance. Volume rallied higher again, a positive for the Nasdaq as it moved over the August high, but on the SP500 and DJ30 it looked like some churning right at resistance. Despite the strong start to the new year, the market is not out of the woods with geopolitical events still out there. Those were pushed back the past few sessions with domestic issues coming to the fore, but they won't be gone forever. Iraq, North Korea, Venezuela are all still there, and after the focus on the stimulus package dies down they will be factored back in some. There are a few good points about them, however. With production shut down in Venezuela, about the only thing we will hear out of that country will be good news, i.e., when production resumes. As for Iraq, with all of the noise the administration is making about war being Hussein's choice, it is pretty clear from the hype that the U.S. intention is for Hussein to leave on his own or have his own countrymen take him out. Only if that does not work will the U.S. go in and do the dirty work.
Market Sentiment
VIX: 27.48; +0.07
VXN: 42.96; -0.49
Put/Call Ratio (CBOE): 0.66; -0.01
Nasdaq
Struggled all session and rallied late to clear the August high on the close.
Stats: +10.25 points (+0.72%) to close at 1431.57
Volume: 1.759B (+12.07%). Volume was up again, rising smartly to above average levels.
Up Volume: 1.138B (-162M)
Down Volume: 598M (+355M)
A/D and Hi/Lo: Decliners led 1.13 to 1. Few stocks participated, but those that did performed well.
Previous Session: Advancers led 1.93 to 1
New Highs: 97 (0)
New Lows: 35 (+19)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq was up and down on the session, rallying to the 200 day MVA on the high (1442.26) but then having to fight at the close to recover to hold above the August high (1426.76). With volume shooting higher it was a promising move though not a powerful move. The Nasdaq has rallied four sessions straight and is once again just off the 200 day MVA (1440), the resistance that turned it back in early December. After the good surge to start the year it may need some rest, particularly with a lot of the potentially positive news already disseminated and the same old global issues hanging around in the shadows. We would have preferred to see it smash through the 200 day MVA on this move and then use it as support. The action is positive, but this is the point we were looking for the move to start tiring. It may take a session to rest and if the Friday employment data has some positives, start moving up again at that point.
S&P 500/NYSE
Unable to hold over the November high at 925, pulling back as volume surged higher. A bit of churning, i.e., high volume turnover.
Stats: -6.09 points (-0.66%) to close at 922.92
NYSE Volume: 1.554B (+9.88%). Rising, above average volume as the index traded in a narrow range after a move higher. That indicates high share turnover as sellers equaled buyers after buyers led the move higher. That is a flag to watch for some pullback.
Up Volume: 648M (-490M)
Down Volume: 884M (+618M). Higher volume led by downside stocks.
A/D and Hi/Lo: Decliners led 1.54 to 1
Previous Session: Advancers led 2.96 to 1
New Highs: 101 (-30)
New Lows: 10 (-1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps could not continue the move, stalling at the early November high (925.66) and sliding back below that level on the close as volume rose. After a week of moves the large caps did not have any extra drive Tuesday to make a definitive move toward the 200 day MVA near 950. The higher volume turn right at a key resistance point is a real caution flag; many upside moves in this market have ended just as this. Floor traders felt pretty good about the session; from their perspective the market did well to hold onto the Monday gains, and there was a lot of optimism related to the economic future. Floor traders are always happy, however, when volume spikes up after being dormant. The key for the index is a moderate pullback that holds near 911 with lower volume. Then a move over 925 and on over the 200 day MVA.
DJ30:
The blue chips also tired after a week of gains, failing to take out the early November high at 8800. That is the key level in the head and shoulders pattern, and once again the Dow rallied to 8802 and then rolled over to close lower. Dow volume rose again as the index ran in place. There is a lot of optimism for stocks, but this is a key point for the market as the major indexes all face key resistance. Churning on higher volume at that resistance is not a sign of strength. The Dow does not have a lot of clear support below it before it gets near 8500. Thus it is important for the Dow to hold near this position on a further consolidation in order to make another run at 8800 and then the 200 day MVA up at 8959.60.
Stats: -32.98 points (-0.38%) to close at 8740.59
Volume: 1.554B (+9.88%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Our concern over the near term resistance remains, particularly with the churning right at that level Tuesday. We saw a few breakouts Tuesday and there were some continued moves that were great, but as the poor breadth indicated, they were much more scattered. After a week of upside, the softness at resistance is normal. The fact that it takes place at such a critical level gives it the appearance of great significance. From here there could be a session or two of rest ahead of the Friday employment report.
We may be reading too much into the move up to resistance. Perhaps fund managers will come back in Wednesday and buy more and more and send the indexes past resistance. The sporadic breakouts (weak one day, solid the next) are an indication of the ambivalence right here. In addition, the action Tuesday was in stocks that pay dividends, not usually the leaders in any big runs. Now they do have some extra incentive to own those stocks, but without the Tuesday demand for those stocks there would have been just a handful of technology stocks leading higher.
Thus we are anticipating a pullback at this stage and will watch volume closely as it does. The higher volume churning on the SP500 and DJ30 is a caution flag though the indexes could give back some of the recent moves and still be in fine shape.
Support and Resistance
Nasdaq: Closed at 1431.57
Resistance: The August high at 1427 and ha not been totally cleared. The 200 day MVA (1439.89). Price resistance at 1500. 1574, the May low, is next.
Support: The simple 50 day MVA (1390.84). 1357, the 1998 bear market low. July, August, and September interim highs at 1345. Some price support at 1300. 1250 is the next price support after that.
S&P 500: Closed at 922.93
Resistance: Still struggling with the early November high at 925.66. Price resistance at 954.28 from the December high along with the 200 day MVA (953.85). 965, the September 2001 closing low along with the August 2002 high.
Support: 921 it could provide support on any test. The July, August and September interim highs at 909 to 911 are next. The simple 50 day MVA (903.95). The exponential 50 day MVA (899.29). The bottom of the October consolidation range at 875. The September 2000/May 2001 downtrend line at 846. 850 to 855 (the October 1997 and Q2 1998 lows). The March down trendline at 820.
Dow: Closed at 8740.59
Resistance: The early November high at 8800 is key to break up the head and shoulders pattern. The 200 day MVA (8959.92). A range of resistance from 9000 on up to 9050. The August high at 9077 would change the downtrend.
Support: The late July and early September interim high at 8726 to 8762.14 (8745 closing) have not been completely cleared. The simple 50 day MVA (8566.06). The October high at 8500. The exponential 50 day MVA (8515.64). 8250, the bottom of the October consolidation range. Then 8000.
Economic Calendar
1-06-03
ISM services, December (10:00): 54.7 actual, 55.8 expected, 57.4 prior.
1-07-03
Factory Orders, November (10:00): -0.8% actual, -0.7% expected, 1.4% October (revised from 1.2%).
1-08-03
Consumer credit, November (2:00): $3.8B expected, $1.5B prior.
1-09-03
Wholesale inventories, November (10:00): 0.2% expected, -0.3% prior.
1-10-03
Non-farm payrolls, December (8:30): 21K expected, -41K prior.
Unemployment rate, December (8:30): 6.0% expected, 6.0% prior.
Hourly earnings: 0.3% expected, 0.3% prior.
Average workweek: 34.2 expected, 34.2 prior.
End Part 1 of 2
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