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us stock market, trend trading stock
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3/26/03 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued. Still letting good plays work for us.
Buy alerts issued: SOHU
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
See Jon Johnson's comments on reverse stock splits in the April 1, 2003 issue of The Bottom Line Personal.
SUMMARY:
- Market continues a lower volume consolidation
- No business investment, new home sales falling faster, Senate cuts tax bill not spending.
- Market consolidates as leaders start moving up already.
- Subscriber Questions
Back and forth session finishes on the down side.
The market was up and down all session, holding right at the flat line level and gyrating up and down depending upon the most recent news story. Bombs hit civilian area in Baghdad: down. Troops kill hundreds of Iraqi forces in battle: up. 100 tanks break free from Basrah: down. UK let them escape so the could be blasted (and were being blasted) by coalition airpower: up. Senate passes budget still heavy in pork, and $350B light in tax incentives: down. It finished on the last story with indexes finishing down about a half percentage point.
Despite the emotional rollercoaster ride resulting from the war headlines the market held up well in another day of mild, lower volume consolidation. There was no major bad or good news; that would impact the market much more. For now the indexes are acting somewhat resilient and forming the type of lower volume consolidation they need to form after the big run and after the big point dump lower Monday.
While the indexes tread water, many individual market leaders moved ahead. Many of our existing positions posted more solid gains as other stocks in good patterns moved out to join them. That is always a positive sign of the strength of the market when leaders continue to outperform the market and new breakouts come in to join them even as the overall market works laterally.
THE ECONOMY
Durable goods orders fall less than expected, but business investment components weaker.
No surprise February orders were lower (-1.2%, -1.5% expected) given the pre-war posture had basically shut down a lot of activity. Economists overshot on the downside for once, but we also note that January was revised down to a 1.9% gain from a reported 3.3% gain, a mere 42% drop from the original report. That does not show the kind of positive increase originally hailed.
Indeed, take out transportation and durable orders fell 2.1% (-1.0% expected). Take out defense spending, orders were even worse at -2.7%. Non-defense spending less transportation, the stated proxy for business spending, fell 2.9%. Moreover, the numbers may be written down further as economists are being surprised by the weakness. We are not; our surveys showed business activity on hold leading up to the war. Again, a weak economy that is going to be weak after the war is over.
The Fed keeps saying that business spending will pick up after the war is over. You have to ask, what will be different when the war is over? Consumer confidence will get a lift, but the problem is business spending. Long before the war became a heated topic in the UN, business spending was very weak. A few signs of life looked positive, but then arguing over the economic package, continued slow business, and spiking energy prices pushed it right back down as original reports of gains were revised lower. 'Wait and see' is a dangerous game; Japan played it and lost, and is now in its twelfth year of depression. What we will most likely see are further unpleasant signs of slowing that exceed economist expectations. They are not taking into account or are discounting the impacts of war, spiking energy, and the continued lack of investment. You have to remember the economy is already weak, and they seem to be ignoring that in their projections regarding the impact of a 75% increase in oil prices the past 12 months.
February new home sales fall 8.1%, January revised down 12%.
New homes sales make up just 20% of the market, but the symptoms of a slowing market continue. Most of the articles you read talk of the continued drop but then add 'it is still a very strong level,' etc. Yes, but even with low rates, continuing the housing sales, new and existing, have started to trend lower. In some areas they are tanking. In the northeast new home sales fell 38%. As interest rates start to tick higher, housing activity will fall off.
Commodity investment surge reversing itself.
Some economists are hoping the rising interest rates signal better economic times that will take the torch for a flagging housing market. That would be the best case scenario. Commodity prices have fallen sharply just as the stock market started to rally. What is going on here? Remember we discussed the excess money in the economy not being loaned (too many banks unwilling to loan to businesses, too many still on loan restriction from the Fed) but instead being invested where it could bring a better return? In 1999 (when the Fed pumped up money supply ahead of Y2K) that money went into the stock market and shot the market unsustainably higher. In 2003 the commodity market was a better bet heading into war. That is where the excess money was being put. With war becoming a reality, the money was pulled from the commodity market. Some has been put in the stock market, while the rest of it sits.
Problem is, that does not get the money into the economy. It helps producers because their raw materials prices are falling, and that helps ease the fear of stagflation. Again, however, it does not get the money into the economy to get it going. That needs to be the key, and a strong economic package that induces businesses to make capital investments and banks to loan for those investments is how you get that money into the economy and leveraged into nice growth. That is the key: leverage, i.e., where $1 put to work generates more than $1 in economic activity after it works through the economy.
Senate approves budget that only slashes tax incentives not existing programs.
Unfortunately, many in the Senate view the cut of one tax dollar that could be used in the economy as one less dollar they will have to spend down the road. As seen in the 1980's, tax cuts and inducements to invest in the economy create many more dollars of revenue than the amount of the tax cuts. The Senate refuses to accept economic facts; it views the decision to cut taxes as a zero sum game, e.g., the decision to spend $60 on a shirt for work or $60 on dinner when you only have $60 in your wallet. In this example, the dinner would be nice, but you could eat a couple of sandwiches for $12 and be satisfied. Given the harder economic times you are experiencing, that is the prudent thing to do. That represents government spending that could be cut, but unlike this example, is not being touched in this budget. But even spending less for dinner you will run out of money in 5 meals. You have to do something to generate more revenue or you are going to starve. Now instead of the expensive dinner, let's say you spend the money on the shirt and the shirt allows you to make a positive impression at an interview and you get a new work contract. To perform the contract you need some new equipment or supplies so you go buy some from the local equipment purveyor. You need some help so you hire a contract worker or two to help out. Bingo. The direct effects of the decision to invest in your own future has set off a chain of economic events that positively impacted you as well as others and returns much more than the 'cost' of the original investment. You get more money from your decision to invest in your business, the equipment seller makes money, the worker makes money, and ALL pay the government taxes on what they make. The economy improves from this ripple effect and the government gets more tax revenue in than it would have without the tax cut. This is not speculation. History shows this to be fact. Our leaders, however, refuse to acknowledge the historical reality of this because they are in politics, and politics comes first.
The Senate basically shot the economic plan in the foot today, and the House is saying it will probably stay at $350B because there is no reason to do the dividend tax cuts half way as it won't have the intended economic effect. They are also talking about spreading it out over several years. That will have the effect of trying to put out a house fire by pouring glasses of water around the perimeter every half hour: too little to do the job, and all you do is squander what you have so there is nothing left to try again. So, unless something major happens we can expect no real stimulus to help ramp up the economy and provide more tax revenue to pay for the war and other problems ahead, and thus hobble on down the path that Japan has already cleared for us, i.e., continued languishing economy in a decade long malaise that the generous are not describing as a depression. If we go, so does the rest of the world. The second recession, just like a relapse from an illness, is always worse.
THE MARKET
Another consolidation session on some lower, below average volume as the indexes hold steady over the 10 day MVA, continuing the solid price/volume action that indicates no heavy selling. After the strong move higher and the quick drop Monday when the market let out some of the war euphoria, the action continues positive. Holding at these levels is what it needs to set up for the next move. As noted, the indexes have been helped by the continuing leaders still rallying and new breakouts joining their ranks.
The action does not end the downtrends, does not change the market character in the bear market, but it does continue the pattern of accumulation that can lead to further upside both near term and longer term. For example, the SP500 is still below the down trendline formed by the September 2000 high to the January 2002 high (now near 932). DJ30 is also still below more than one down trendline sprouting from the series of highs beginning with January 2000. Moreover, they are below down trendline of some descending triangle patterns that formed off of the August, December and January highs. On the other hand, you can view DJ30 also in an accumulation pattern, a broad reverse head and shoulders base from July 2002 to the present. A breakout from that base would simultaneously break it out of the descending triangle. Thus, there are competing forces at work.
Nasdaq is in better shape but not surging without resistance. It made a higher high in November and December, breaking the August high and a string of lower highs. It is working on an even more significant move over the December and January highs, and that will be significant. It still will have some old down trendlines to wrestle with, but such a break over those highs would be quite significant as the techs would have embarked on, of all things, an uptrend.
Looking at DJ30 is too narrow a view. SP500 is better, and the New York Composite is broader. They are all in the same general trend as outlined above. If they are going to have a chance to break that trend it will be the relative strength leader, i.e., Nasdaq, that will again do the heavy lifting. Nasdaq has to maintain its leadership and make those higher highs. That would be the sign of a healthier market. The war is going well but not quickly, the economy is still lethargic (at best), and economic aide is being slashed by nervous leaders in Congress. Many obstacles to a healthy market, but as noted earlier in the week, noteworthy bottoms often start in what look to be the worst of times.
Market Sentiment
VIX: 32.19; -0.47
VXN: 43.94; -1.06
Put/Call Ratio (CBOE): 0.86; -0.08. Remains high showing a bit of nervousness in the market.
Nasdaq
Moved laterally in a very tight range over the 10 day MVA as volume fell.
Stats: -3.56 points (-0.26%) to close at 1387.45
Volume: 1.41B (-1.26%). Volume continued to back off on the lateral move, again coming in right at average levels.
Up Volume: 809M (-317M)
Down Volume: 576M (+361M)
A/D and Hi/Lo: Decliners led 1.21 to 1. Very modest A/D line after the strong positive showing on the way up.
Previous Session: Advancers led 1.85 to 1
New Highs: 78 (+22)
New Lows: 42 (+9)
The Chart: http://www.investmenthouse.com/cd/$compq.html
For the third session after Friday high Nasdaq moved laterally over the 10 day MVA (1377), trading in a very tight range (14 points). It was led up and down by each news headline, but it was a narrow range that saw no real fall lower and occurred on lower volume. This pattern is looking more like a nice lateral consolidation (handle) on the short, 3-month double bottom that formed off the February and March lows. While there is still significant overhead resistance at 1425 (recent and August high), 1470 (January high) and then 1521 (December high), this lateral consolidation is what Nasdaq needs to do to prepare for an attempted move through those levels.
S&P 500/NYSE
Same story, holding over the 10 day MVA in a lateral move on lower volume.
Stats: -4.79 points (-0.55%) to close at 869.95
NYSE Volume: 1.302B (-1.73%). Another lateral session on lower, below average volume.
Up Volume: 443M (-662M)
Down Volume: 836M (+611M)
A/D and Hi/Lo: Decliners led 1.28 to 1. Modest downside action that matched the small loss.
Previous Session: Advancers led 2.6 to 1
New Highs: 45 (+5)
New Lows: 30 (+2)
The Chart: http://www.investmenthouse.com/cd/$spx.html
SP500 again ran into resistance at 875 on the session high (875.80) but could not make a move over that level. In the end the large caps finished basically mid-range for the session, managing to hold above the 10 day MVA (863) on the low (866.47). Doing what it needs to do at this point, digesting the big move off the March low on while holding above near support at the 10 day MVA and the 50 day MVA (856 exponential, 851 simple).
DJ30:
Struggling at 8250 resistance, but as with the other indexes, holding over the near support at the 10 day MVA (8166) as volume drops below average on the move. That continues the very good price/volume action seen the past three weeks. The bigger picture regarding trendlines, etc. was discussed above. For now DJ30 is doing what it needs to do, consolidating the strong upside move with more buyers than sellers in the market.
Stats: -50.35 points (-0.61%) to close at 8229.88
Volume: 1.302B (-1.73%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
It is easy to see the war emotions playing on some commentators. On the war rally up there were historic moves being made. When the new week came and the market let out some air and started to consolidate, some of those same commentators are now seeing problems in the market the past three days as it moves laterally, holding near support on low volume. "Risk down to 1300 or the March lows" on Nasdaq one ominously proclaimed. It may happen if a really bad news story hits, but that would hurt any market. The current action does not indicate such a fall is imminent. You have to keep the emotions in check. It is not easy to do, particularly with minute by minute war news. We always have to sit down, let the emotions cool, look at what is happening as if we had $0 invested, and then devise a game plan.
What that game plan is telling us at the present is the market is not showing distribution, meaning there are relatively more buyers than sellers in the market, as it works to digest that big move up off the March low. While this may just be a war rally that ultimately fails, right now the market has shown solid accumulation, good resilience, and many solid breakouts holding and moving higher while more breakouts join in the move. That is a sign of health right now, and when the market is showing you healthy action you have to act on it. It is hard to buck emotions brought out by three years of selling, but you have to divorce yourself the best you can and do what the market is showing. That requires you to cut and run if it starts distributing, but you are in place and reaping the benefits of the moves if the move proves to have legs.
Thus we are continuing to watch those breakouts on volume (there were a few more today again) and those stocks that have made strong moves and are providing subsequent entry points (tests of the breakout or early tests of the short term MVA). Those are providing the most sustained upside action and we will continue to pick them off as they provide entry points. When stocks continue to breakout and rally after the moves, that is a very positive sign for the market as it means money is still being put into the market even as it moves laterally. We aim to take advantage of those moves.
Support and Resistance
Nasdaq: Closed at 1387.45
Resistance: The early November, March and early November highs (1420, 1426, and 1427, respectively). The January high (1467). The December high (1521).
Support: The 10 day MVA (1377). 1357, the 1998 bear market low. The 18 day MVA (1361). Exponential 50 day MVA (1349). The 200 day MVA (1344). The January 2002/January 2003 down trendline at 1344. The simple 50 day MVA (1340). Some price support at 1300. 1261 (the February low) and 1250 is point where some lows have held.
S&P 500: Closed at 869.95
Resistance: The bottom of the October consolidation range at 875. 200 day MVA (890). Then price tops at 911 (July) and 925 to 935 (November and January peaks).
Support: Price support at 868 from top of January range. The 10 day MVA (863). The exponential 50 day MVA (855), the simple 50 day MVA (851). The 18 day MVA (855). Price support at 825.
Dow: Closed at 8229.88
Resistance: 200 day MVA (8419). November and January highs (8800, 8870). December high (9044).
Support: 8250, the bottom of the October consolidation range and other index lows is still trying to hold. The 10 day MVA (8167). The top of the January range at 8160. The exponential 50 day MVA (8081)and the 18 day MVA (8073). The simple 50 day MVA (8038). Price support at 8000 and then again at 7750 and 7532, the July low.
Economic Calendar
3-25-03
Consumer confidence, March (10:00): 62.5 actual, 62.0 expected, 64.8 prior (revised from 64.0).
Existing home sales, February (10:00): -4.3% actual (5.84M), 5.80M expected, 6.09M prior.
3-26-03
Durable goods orders, February (8:30): -1.2% actual, -1.5% expected, 1.9 prior (revised from 3.3%).
New home sales, February (10:00): -8.1% (854K) actual, 928K expected, 914K prior.
3-27-03
Initial jobless claims (8:30): 420K expected, 421K prior.
Q4 Final GDP (8:30): 1.4% expected, 1.4% prior.
3-28-03
Personal income, February (8:30): 0.2% expected, 0.3% prior.
Personal spending, February (8:30): -0.2% expected, -0.1% prior.
Michigan sentiment final, March (9:45): 75.0 expected, 75.0 prior.
End Part 1 of 2
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