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us stock market, top stock pick
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5/10/03 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: SCSS
Buy alerts issued: MME; FLIR; FFIV; CEDC
Trailing stops issued: None issued
Stop alerts issued: NXTL
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market bounces as expected, salvaging the week.
- Senate tax package a mass of illogic which, based on senator comments, is no surprise.
- Market well positioned to start the week with smart bounce off 10 day MVA.
- Subscriber Questions
A nice way to end the week.
Nasdaq had set up well on the 10 day MVA along with the SP500, and after two days of orderly pullback the indexes jumped up and never really looked back. Volume was not great on this Friday so it was not robust (the new 'in' adjective) accumulation, but breadth was very impressive as all of the indexes held at near term support and bounced with Nasdaq leading the way with a 2% gain. Sometimes gut feelings as we had Wednesday, when the result of a careful review of relevant indicators, are not just lunch backing up on you.
As the week came to a close the parrots on television were quick to say though the market closed higher on Friday, for the week the market was basically flat. The conclusion was the action was not that great, just another week in a trading range. Not really. We often say that we are more interested in where a stock is finishing a session or a week than where it started. That is why we often take positions in the last hour and even half hour; it gives us a much better read of the action and what the true support is behind a move. Same thing with the market.
Some examples. What if the market had surged at the first part of the week, looking outstanding, and then collapsed the last two sessions to close where it started? Compare that with this week where the market started out slow, rallied solidly Tuesday to continue the prior Friday breakout, tested back on lower volume, then rallied back up Friday. Which scenario is better? Which sets the market up better for next week? The rally and collapse shows the sellers won the week. The latter scenario shows the buyers were ready to step right back in after a modest pullback to support and pick up stocks when they were considered a better value. Not only does that set the market up better for the following week, it also shows the continued bullish action demonstrated during this rally. In our view it was the rally acting as it has, just with less volume this Friday. Most indexes, particularly Nasdaq, SP600 (small caps), and SP400 (mid-caps) are set up beautifully to take out this resistance level and push higher.
THE ECONOMY
There are two big debates right now. First, what size tax package is best and how to make it so all can sign off on it. Second, is the economy really going to recover? A lot of airtime is spent on discussing each, but maybe they are not all that important at this juncture. Why? Because after all of the dissection, what really matters is how the market is acting.
Is the economy going to recover?
Yes, it always does, but the question is when. It keeps getting pushed back to the second half every year for the past three years. It is now the second half of 2003. Twelve to 18 months back some smart people were saying that this time the market would not rally until the economy actually turned the corner. The market has rallied from the October low when the economic outlook was really bad. It has not improved even though the market has. The market foretold the economic collapse when it topped in March 2000 and tanked. The good action now is indicating the economic future may be a lot brighter than the current economic prognostications suggest. Indeed, commodities have fallen, but they have hit the up trendline and have moved up right along that trendline for the past month. Commodities are very economically sensitive, and even with the drop in oil prices (that accounts for most of the drop to the up trendline) they continue to improve. Markets turn before the economic bottom has hit. If this is the market bottom, that would certainly be the case with this economy.
Senate tax cut package is a shell game.
The senate has burned a lot of oil and trees trying to compromise on the tax cut package. The most recent compromise supposedly gets rid of gimmicks and has won over moderate republicans. It allows some dividend tax relief, but to get it the senate came with what it calls offsets. Now most saw an offset as a spending reduction. What the compromise involved was a shell game that trades one tax source for another one. US citizens living abroad receive a tax break for the first $80K of income they make because they also have to pay taxes in the country where they work. The credit was created to make it equitable for US citizens to work abroad for their US corporations and allow US corporations to compete overseas. The senate saw that as a $32B piece of fruit for the picking. Instead of looking for serious cuts in unnecessary spending, the Senate played an old government accounting game: shifting tax burdens as it sees fit. It will eliminate that credit in order to allow tax cuts elsewhere. In other words, it has simply shifted the source of its tax revenues. There has been no reduction in taxes, just a change of sources of tax revenue. If the senate gets its way, those overseas will pay 70% to 80% in income taxes on that first $80K. That means they will have less money to ship home to those family members here in the US who spend that money just as much as the rest of us. The net result: no real benefit from a significant portion of the tax cuts. They propose to give some a tax break while raising taxes for others. It will make more money for tax lawyers and accountants, but it won't do anything for the economy.
Moreover, it simply puts US corporations at a greater disadvantage overseas, another inhibitor to economic activity. They will have to pay employees more to get them to go overseas to do the corporation's business. That cuts into the bottom line. The senate plan also causes wage inflation through another government regulatory scheme. Instead of fixing the problem, the senate has opted to do the usual, i.e., avoid making hard decisions and punt.
THE MARKET
Very broad move after the two-day pullback pushed the indexes right back up to the resistance and a good point for next week. Mid-week the poor economic data and attempts to sell the market could not take it down. The recovery was not big but the market did what it needed to do and what it had set up to do.
In addition small and mid-caps recovered well off of their test of the strong move. We have talked about those indexes the past two weeks, and they are very important. At the end of the boom there were years of large cap outperformance versus small caps as the large indexes rallied higher and higher on narrow breadth. Small caps tend to perform in the early and mid portions of an economic expansion. They tend to underperform as the economic expansion grows long in the tooth and money starts to move to the 'safer' large caps. That is precisely what happened in the last half of the 1990's when you could not give a small cap away while DELL, MSFT, CSCO and company continued to suck in the money.
Small cap performance is a very nice attribute to this rally in addition to the solid accumulation, breadth, and leadership. Some call the small cap interest 'speculation'. We heard that Friday after the close yet again. They are missing the underlying concept: small caps are performing well not because there are a lot of retail investors in the market speculating (that $2 trillion is still on the sidelines) on low priced internets and techs as they were in 1999, but because big money is moving into these stocks in anticipation of an economic upturn coming in the second half of 2003. Many pundits are trapped in a bear market mindset and see everything in that light instead of looking at the price/volume action, accumulation, leadership, and other indicia of a healthier market. We have discussed how this rally has different attributes from other rallies in the long downtrend as it has, contrary to what many pundits say, taken its time by rallying then consolidating for a substantial periods, then rallying again as opposed to a sharp run straight up that fizzles out.
Market Sentiment
Friday continued the overdone debate over whether this was a new bull market or just another bear market run. There are a lot of bulls and there are a lot of bears on television and in investment houses. It is clear, however, that just as in all serious rallies after long term selling, the retail investor, the average person on the street, is still very skeptical. Money is starting to flow back to mutual funds but it is still a relative trickle. The indecision about what is actually happening keeps retail investors as confused as many of the pundits who act on their feelings or pet indicators that may or may not work in all market conditions. That is why we stick to the nuts and bolts: price/volume relationships, leadership, breadth.
VIX: 22.04; -1.65
VXN: 32.09; -1.2
Put/Call Ratio (CBOE): 0.82; -0.16
Nasdaq
Bounced off of that doji on the 10 day MVA smartly though did not attract a lot of volume as it continued the breakout of the cup with handle it started the Friday before.
Stats: +30.46 points (+2.04%) to close at 1520.15
Volume: 1.561B (-3.29%). Volume contracted slightly though still above average. One of the few up sessions where volume did not rise on a gain. That is not a negative, just not an indication of accumulation Friday.
Up Volume: 1.212B (+926M). Those in the market were all buyers as evidenced by the up to down volume.
Down Volume: 331M (-976M)
A/D and Hi/Lo: Advancers led 2.21 to 1. Excellent volume as once again upside breadth far exceeds downside breadth when the market falls.
Previous Session: Decliners led 1.56 to 1
New Highs: 148 (+12)
New Lows: 19 (+6)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq gapped up from its 10 day MVA test, and never threatened negative territory as it rallied to a 2% gain. It again is right at the December intraday high at 1522, the point it needs to beat to establish a confirmed uptrend. Volume was not there to push it Friday, but the action was a good test and confirmation of the breakout from the cup with handle the prior Friday. The action for the week was solid with a breakout test and rebound. This week will tell more of the tale as to whether Nasdaq will continue the rally or consolidate this move, but the ability to test the breakout and then rally is very health action and it could rally to 1550 to 1560 before coming back on a more sustained test of 1522.
S&P 500/NYSE
As with Nasdaq, SP500 rallied off the 10 day MVA after testing last Friday's breakout from the cup with handle.
Stats: +13.14 points (+1.43%) to close at 933.41
NYSE Volume: 1.298B (-1.96%). A slight drop in already below average volume. It was not an accumulation session on par with the prior moves. Block trades remained heavy, however, showing solid institutional action.
Up Volume: 1.021B (+681M)
Down Volume: 274M (-698M)
A/D and Hi/Lo: Advancers led 2.91 to 1. Outstanding breadth as up upside breadth continues to trounce downside breadth.
Previous Session: Decliners led 1.24 to 1
New Highs: 222 (+36)
New Lows: 3 (0)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Two Friday s back the large cap index broke up and out of a cup with handle that had formed this year. It rallied sharply Tuesday on strong volume and then tested back to the 10 day MVA on lower volume. Friday it resumed the move up. This is very good action, indicative that the SP500 will try to move through resistance at 935 (January high) and take on the December intraday high at 954 before a more prolonged consolidation.
DJ30:
The blue chips have still been unable to put much mileage on the breakout from its ascending triangle, but after a test of the prior breakout, they held the break and started back up Friday on rising though still below average volume. The blue chips actually put on some volume, helped by multinational corporations benefiting from a weakened dollar. That weaker dollar helps this out for awhile, but it will need to strength at some point for the overall market. In any event, the Friday move was what the Dow had to do, and now we see if it can put on more volume as it moves higher.
Stats: +113.38 points (+1.34%) to close at 8604.6
Volume: 1.298B (-1.96%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
Friday was helped by some upbeat comments from the Intel president indicating China business had not slowed and that a chip recovery would occur this year. Man, we have heard that from Intel before. For the past two years Intel has thought a recovery was coming in the second half. It was wrong both times and it paid for it by ramping up production in anticipation of demand. At least it put its money where its mouth was, but it just goes to show that its track record for predicting business activity in its own industry is not very good. The market bought into it again, literally, and enjoyed a solid session.
This week it is back to serious business. Earnings are all but over with the exception of Dell. It will be a time to focus on economic reports once again as well as the status of the tax package. We can only hope on the latter point that our senate leaders do not choose to squander a great opportunity to make a difference long term for the US workers and entrepreneurs. They are hell bent on blowing the chance, and it is very frustrating for those that provide the investment dollars and hard work to make the economy happen. We can roar back and be great again or we can muddle through.
Regional manufacturing reports will give the latest heartbeat on industry along with production and capacity utilization. The consumer's pulse will be measured with retail sales, housing starts, and Michigan sentiment for May. We are not expecting any monumental changes that will show the recovery is here. The economy can muddle through for several more months before things really start to improve. If Congress can get together on a serious tax package that really has some tax cuts that will stimulate business we could see a real turn in corporate investment. As long as tax cuts are put off or incrementally implemented, however, investment is put off as well. That is a hard fact of economics that our leaders need to grasp. Implement tax incentives in full immediately if you want real impact.
The market is still at a critical point even with the test of the breakout and the Friday recovery. There needs to be more volume upside to breakout and put some cushion between any move and former resistance. The further the move through resistance, the more chance that it will act as support on the test of the breakout. That is what we want: a strong breakout and rally higher, then a test/consolidation that holds the former resistance as a support level. That proves up the breakout over resistance, and in the case of Nasdaq, a hold at that level and subsequent move back up confirms the new uptrend as Nasdaq would have clearly broken the string of lower and lower highs that marked the long, ugly downtrend.
That is what is at stake coming this week. Despite the rally we see many stocks that are ready to make a breakout, are just starting to make the break, or have tested back on a prior breakout and are moving up again. That helps provide some fuel to help the indexes move higher despite many saying the move has topped out. The more that say the move has peaked, the better the chances it has more room to run. If it does we look at Nasdaq 1250 to 1260 as the point to watch.
Support and Resistance
Nasdaq: Closed at 1520.15
Resistance: The December intraday high (1522). 1575, May 2002 closing lows.
Support: The August 2001/January 2002 down trendline (1499). The 10 day MVA at 1490. The 18 day MVA (1468). The January high (1467). The March and August highs (1426 and 1427). The exponential 50 day MVA (1417).
S&P 500: Closed at 933.41
Resistance: 935 (November and January peaks). 954 (December intraday high).
Support: The 10 day MVA (923). The 18 day MVA (913) and price tops at 911 (July). September 2000/March 2002 down trendline (908). March and April highs (896 and 905). The 50 day MVA (890) and the 200 day MVA (882). The bottom of the October consolidation range at 875 down to 868, the top of the January trading range.
Dow: Closed at 8604.60
Resistance: November and January highs (8800, 8870). December high (9044).
Support: 8522 and 8520, the March and April twin peaks. The 10 day MVA (8520). The 18 day MVA (8462). The 200 day MVA (8321). 8250, the bottom of the October consolidation range and other index lows is some support.
Economic Calendar
5-13-03
Trade Balance, May (8:30): -$41.0B expected, -$40.3B April.
5-14-03
Retail sales, April (8:30): 0.4% expected, 2.1% March
Retail ex Autos (8:30): 0.3% expected, 1.2% March.
5-15-03
New York PMI, May (8:00): -11.5 expected, -20.4 April
Initial jobless claims (8:30): 440K expected, 425K prior.
PPI, April (8:30): -0.5% expected, 1.5% March.
Core PPI (8:30): 0.0% exected, 0.7% prior.
Business inventories, March (8:30): 0.2% expected, 0.6% February
Industrial production, April (9:15): -0.3% expected, -0.5% March
Capacity utilization, April (9:15): 74.6% expected, 74.8% March.
Philly Fed, May (12:00): -6.0 expected, -8.8 prior.
5-16-03
Housing starts, April (8:30): 1.750M expected, 1.780M March
Building permits, April (8:30): 1.700M expected, 1.692M March
CPI, April (8:30): -0.1% expected, 0.3% March
Core CPI (8:30): 0.1% expected, 0.0% March
Michigan sentiment preliminary, May (9:45): 87.5 expected, 86.0 April.
End part 1 of 3
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