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us stock market, trade stock
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5/12/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: VTAL; CNCT. Still letting many run higher.
Buy alerts issued: IBM; BRCM; MDCO; DRIV
Trailing stop alerts: CYBX
Stop alerts: None issued
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SUMMARY:
- Friday bounce continues with some solid Nasdaq volume.
- Dollar falls on noncommittal Treasury Secretary comments.
- Nasdaq, SP500 clear resistance with more authority.
- Subscriber Questions
Indexes follow Friday setup with nice gains.
Futures were slightly negative but not selling off as a CSCO upgrade and neutral Treasury Secretary comments regarding the dollar offset each other. That set up our favorite 'soft open' scenario where some sellers use a prior up session as a selling point given some possibly negative news. What we like is that those sellers are typically few in number, and once they are gone the indexes often snap right back and build throughout the session. That is precisely what happened Monday as stocks started lower then reversed in the first half hour and rallied all session. That continues the bullish intraday action exhibited in this rally: down early, rallying into the close.
Volume was up, particularly on Nasdaq, but it was also not blowout. A good, above average volume surge does indicate that accumulation continues as the market rises on rising volume and then eases back on lower volume. That shows more buyers than sellers in the market overall. The leaders were rising on strong volume as well, a further indication that buyers are still buying in numbers that for now are easily exceeding the number of sellers.
THE ECONOMY
Treasury Secretary ruffles dollar Sunday.
Secretary Snow, the second in a line of old economy, big manufacturing secretaries, apparently did not support the strong dollar policy enough for many currency traders. As a result, the dollar hit a low versus the Euro not seen since January 1999. There was a lot of reading between the lines; the words spoken indicated a continued commitment to a strong dollar, but the administration was not going to jump right in and take steps to support it every time it dipped a bit.
That is no real departure from the prior position, and it is already clear over the slide the past few months that the administration is not going to jump in every time the dollar weakens. Still, the currency markets are very skittish; if a dog barks at a currency trader he will sell immediately if he does not pass out from the fright first. The point: currency markets are the most sensitive there are and they trade more on good or bad feelings as opposed to technical indications. That is not entirely true, but in the big picture that is the gist. Thus if there is any perceived wavering in a position, it impacts the currency market.
There is no question that large multinational companies have benefited from a weaker dollar the past several months. In this last earnings season we saw many of the behemoths reporting solid gains in earnings not necessarily from improved sales but from improved exchange rates. Much as with say a Dell that improves earnings by cost cutting as opposed to an expanding market, however, these gains are not the real McCoy in that they show no real growth. Multinationals thus love a weaker dollar as it improves the bottom line without having to do one thing different. As for those of us here at home, the domestic based businesses, and the stock market, it can turn out to be a bad thing.
A weaker dollar means fewer want to hold the dollar and accordingly dollar based assets as a store of value. There are more owners out there that are selling the dollar and that is why the price is dropping. Some correction from the long run up is okay and normal; nothing can run higher without resting forever. The problem comes when a normal correction starts to look like protracted weakness. Then some selling leads to more selling. More selling leads to lower valued US investments. That leads to dumping those investments and converting that money into investments based in other currencies. The dollar continues to lose value in a worsening cycle. There is a real time example: Japan. It refused to support the Yen, refused to make necessary corrections in the banking sector, and refused to provide the right kind of economic stimulus. Result: 12 year depression.
Thus is it extremely important for the US and the old economy boys in the Bush administration not to let this 'compassionate neglect' to get out of hand. A weaker dollar helps prevent deflation if it does not get out of hand: it increases exports and that in itself increases demand for the dollar that ultimately firms the currency. It just cannot get out of hand. So far it is well within hand and the market is seeing it for what it is: a good way to get US manufacturing up out of its recession. If it gets too far out of hand then US assets are dumped, and that sends dollars back home and we have inflation potential without economic growth.
Bond market telling us anything?
The bond market continues to rally as it shows no signs of fear regarding the dollar, deflation, inflation, you name it. The bond market is historically a good judge of the economy overall, and it is showing no problems. There are, however, a few things we should realize before we all start to rest comfortably that the US economy is A OK.
First, the Fed is monetizing the short end of the curve, i.e., it is buying short maturity treasuries. It is doing this to keep interest rates lower and thus hopefully keep the consumer buying. Interest rates have been trying to rise on their own, and indication that there could be some real economic upturn coming. The Fed is tamping them down with short end purchases. There is talk about the Fed buying longer maturities even as no one mentions the action at the short end. That would also have the effect of keeping rates lower as the Fed prints more money. This keeps the bond market rally alive as well.
That last point is another key consideration. The bond market received billions and billions of investor dollars as those investors fled stocks to another form of investing. Some big bond fund managers have done what they can to encourage that by saying things such as the Dow would be at 6500 before it hit 10,000 again, etc. Investors scared of stocks have pushed billions into bonds, furthering the rally just as they furthered the rally in stocks in the late 1990's.
That does not mean the bond rally is going to end quickly, just that when it does it has the chance to swing much more sharply the other direction when it does just as stocks finally did after bears cursed the rally for years before it peaked. There are other fundamental drivers of the bond market other than just market demand. The Fed is the largest, and as we have stated time and time again, when the Fed is involved it will finally achieve its result, but where a scalpel would be the best instrument to get there it uses a chain saw. That is why the repercussions are often much more severe than desired.
THE MARKET
Another solid session with some rising volume and solid breadth, though the small and mid-caps took a back seat after leading the prior moves along with Nasdaq. That is something that we have chronicled about this rally: the small caps have come to life and tend to lead the moves back up after pullbacks. Then the large caps make up some lost ground as the bounce back up continues. That action continued Monday after the smaller cap issues and techs started things back up Friday.
It was not a huge session. The point gains were impressive, breadth was solid, and volume rose. The numbers were not blowout. They were adequate to get the job done, i.e., rising volume on a rally off a nice, orderly test of the breakout by Nasdaq and SP500 from their cup with handle patterns two Fridays back. This continues the solid price/volume action that shows more volume on the up sessions and lower volume when the market sells.
In addition to the continuation of the nice cup with handle breakouts, Nasdaq and SP500 look as if they finally put some distance between the close and the December and January high, respectively. The indexes had tapped at those levels for a week, unable to make the break. Monday they did so with solid though not outstanding upside volume. That now sets the stage for Nasdaq to test 1550 to 1560, and maybe even 1575. SP500 takes aim on the December intraday high at 954.28.
Market Sentiment
Volatility continues to decline and we still have several questions about how the market can rally even as volatility falls and remains at levels considered in the low end of the 'normal' scale. Volatility is a secondary indicator. By that we mean it is based on intangibles such as investors fear or greed. Those are inherently difficult to quantify in the continuing shifting sands of investor sentiment. What might be a significant level during a bull market could be less significant in a bear market or even at different times in the same bear market. We do not ignore it or any sentiment indicator when it reaches extreme readings, but we also know that it can continue at low or high levels for long stretches with no impact on market action. The same can be said for other sentiment indicators as well as more technical indicators such as stochastics or MACD. After reaching critical levels they can run laterally at that level for months or even make the prescribed turn but have no impact on the stock or the market.
It is always key to keep abreast of the sentiment indicators but not let them control your investment decisions. They are warning flags that make you look hard at the primary indicators such as price/volume action, patterns, and leadership. Keeping them in mind and reviewing them also keeps you honest with what you are looking at in the primary indicators: are you glossing over rising problems in leadership breakdown that the low VIX might have been warning about? Thus keep them in the analysis, but do not use them to time your investments because the WHEN is the key. They are not good timing instruments, just confirmations of what the primary indicators are showing you or are alerts to be on the ready in case something starts to break apart.
Finally, the current level is not historically the lowest volatility has been even as the market continued to surge. Two weeks back we discussed listed other times when volatility was lower but the market still rallied well past those times when volatility had already hit was would be considered low. Again, the timing issue comes into play.
VIX: 21.42; -0.62
VXN: 32.58; +0.49
Put/Call Ratio (CBOE): 0.76; -0.06
Nasdaq
Continued the Friday rebound, rising on solid volume, breaking 1522 and putting some distance between it and that level.
Stats: +21.25 points (+1.4%) to close at 1541.4
Volume: 1.78B (+14.06%). A solid surge in volume, well above average but not the super volume seen on the cup with handle breakout. Rebounds from tests of prior strong breakouts, however, do not require blowout volume but simply a strong surge. That is definitely what Nasdaq provided Monday as buyers continued to step back in after the dip to test the breakout.
Up Volume: 1.461B (+249M)
Down Volume: 300M (-31M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Solid and continuing the pattern of stronger upside breadth.
Previous Session: Advancers led 2.21 to 1
New Highs: 206 (+58)
New Lows: 6 (-13)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Started soft and then led higher as the large names made the most hay in the market after the smaller names were in the spotlight last week. Nasdaq put some distance on the December high at 1422 and did so on expanding trade. Relative strength was breaking out as well. Now we look for next resistance that can come in at 1550 to 1560, but 1570 to 1578 from the June 2002 high and the May 2002 low provide the next significant resistance point. After a run to that point Nasdaq would be in real need of a rest, but with more money coming in we just keep that point in mind as we watch leadership and the price/volume action.
S&P 500/NYSE
It was a struggle in coming, but when it happened the large caps made it look fairly easy to take out the January high. Volume was the disappointment.
Stats: +11.7 points (+1.25%) to close at 945.11
NYSE Volume: 1.358B (+4.66%). Volume increased, but it was relatively light and barely made average. Not stellar, but a rising volume gain after a strong breakout and subsequent test is very good action.
Up Volume: 1.16B (+139M)
Down Volume: 204M (-70M)
A/D and Hi/Lo: Advancers led 2.33 to 1. Solid advancing breadth yet again though the smaller and mid cap stocks trailed the large caps in the Monday action.
Previous Session: Advancers led 2.91 to 1
New Highs: 290 (+68)
New Lows: 4 (+1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tested lower early, held well above the 10 day MVA (927) on the low, and then the rally was on. SP500 paused a bit at 935, testing back down from that level early in the session, but then it made a clean break and never looked back. Rising volume on the move up off the breakout test is a solid indication that buyers still outnumber sellers in this rally. It was not blowout volume and to be honest we wanted to see more. It put a good cushion between it and that January peak, but the volume keeps us watching with caution. The next level of resistance is the December intraday high (954).
DJ30:
The blue chips lagged but not buy much as they too led the small and mid-caps Monday. Volume was solid but not huge. IBM provided a solid boost with a $1.45 gain as the Dow continues to remind everyone that it has more tech components. This move was a successful test of the ascending triangle breakout, and now the Dow has 8800 to 8875 to worry about as it continues, along with the other indexes, to take down resistance points one at a time. It is not a straight shot through them; they are working for their gains. That is the best kind of recovery: rally, consolidate the gains slowly, then rally some more. The indexes have set a good foundation and they are building upon that.
Stats: +122.13 points (+1.42%) to close at 8726.73
Volume: 1.358B (+4.66%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
The economic reports start in force Wednesday and will flood us with data at that point. Right now the market is moving on its own. After two solid upside days on the bounce the index still has momentum, but it will be looking for a breather after another session to session and one half of gains. That is how this market has been rallying, very similar to many of the stocks that are leading the charge.
As always we don't want to jump on stocks that are too extended after a move such as this. There will continue to be stocks breaking out of bases even after the rally has resumed for two sessions simple because stocks breakout in waves; some test their breakouts as others move up and start their moves. Thus there will still be stocks to buy, but we don't want to chase those that have used the past two sessions to rally. We let current plays work for us and then look to move into those stocks providing breakout entry points or pullback entry points (different sectors are moving up at different paces with some testing back while others have started back up).
The market made the move that we anticipated back in the Wednesday report, and we have entered new positions, let others ride, and have taken some gains. We will continue to do the same as long as the market continues to show strong leadership (basically the stocks we have entered that are still moving up and not breaking down) and solid price/volume action (strong volume on up sessions, declining volume on down sessions). There are those such as Doug Cliggott reading the market as overbought and setting up for a more violent fall based on the bond market action (he sees the markets telling divergent stories), those that are new raging bulls, those that are continuing bears, and just about every degree in between. All that tells us is to be selective, be patient, and let the good stocks provide good entry points and move in. We will let the market tell us who is right and let those on the tube worry about what fair value is. A market is made up of buyers and sellers. At some times the buyers are willing to pay more than at other times. We don't pretend to be smarter than all of the buyers and sellers that make up the stock market. We are happy to look at their tracks in the sand and act accordingly.
Support and Resistance
Nasdaq: Closed at 1541.40
Resistance: Some potential resistance at 1550 to 1560. 1570 to 1578 (June 2002 closing low, May 2002 high).
Support: The December intraday high (1522). The 10 day MVA at 1500. The August 2001/January 2002 down trendline (1498). The 18 day MVA (1476). The January high (1467). The March and August highs (1426 and 1427). The exponential 50 day MVA (1422).
S&P 500: Closed at 945.11
Resistance: 954 (December intraday high). 965 (August 2002 peak).
Support: 935 (November and January peaks). The 10 day MVA (927). The 18 day MVA (917) and price tops at 911 (July). September 2000/March 2002 down trendline (906). March and April highs (896 and 905). The 50 day MVA (892) and the 200 day MVA (882).
Dow: Closed at 8726.73
Resistance: November and January highs (8800, 8870). December high (9044).
Support: 8522 and 8520, the March and April twin peaks. The 10 day MVA (8557). The 18 day MVA (8490). The 200 day MVA (8323).
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.
SEMINARS ON CD
http://www.stockseminarsonline.com
This is Jon Johnson's own site devoted exclusively to seminars designed to teach you what you need to know about the stock market and stock movement and how to take advantage of those moves without incurring the usual high costs of travel and related expenses usually associated with seminars.
End part 1 of 2
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