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us stock market, trend trading stock
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4/28/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- GDP doubles expectations and Greenspan is smiling.
- Markets like the economic news, but it was no blowout day.
- A closer look at the economic numbers.
- Subscriber Questions.
- Team Trades.
ONLINE SEMINARS:
Live, interactive web seminars. We can and will jump to the web to look at web sites, view the market and after hours sessions on eSignal on the Wednesday evening and Friday morning courses, and we can pull up and review any chart you want to take a look at!
Choose your courses (package discounts available) and choose your times (Wednesday evenings, Friday mornings, and Saturday mornings).
For more details and to sign up:
http://www.investmenthouse.com/signup1.htm
THE SUMMARY
Economic news was big, but the markets did not explode.
The futures were locked at the top of the range before the open on the GDP news, but as we often see, the gains were waning as the open approached. We were looking for a catalyst to send the indexes higher or lower. This was some good news, but not everyone was buying it. It did not give the indexes a definitive move as the indexes climbed, but as expected last night, not on high volume.
Indeed, the lack of a good punch of volume on some surprisingly strong GDP numbers was a disappointment. Fridays are often milder volume days, and with the quiet week in front of it, we were not going to be surprised at a low volume Friday. The failure of the economic numbers to bring in the big institutions, however, was a bit surprising. The indexes seemed to be poised for a move, but it was an uninspired attempt at rallying, much in character with the week.
We were glad for the gain as opposed to a sell off on the numbers, but now we see the Nasdaq right below its 50 day MVA again, the S&P 500 right at resistance as well, and the Dow still trying to forge ahead through a lot of resistance from 10,700 to 11,000 that was formed from November 2000 to February this year. We start next week with some of the same questions we had toward the end of this week: generally bullish action, but just not quite able to break away and put in the good gains with a rush of buyers.
A poignant example: the Dow and S&P 500 finished the week higher, but they volume for the week was the lowest in the last 7 weeks. That is not great price/volume action. The Nasdaq on the other hand was down for the week, but so was the volume. Despite two very mild distribution days that grabbed our attention on Tuesday and Thursday, the index sold back on lower volume. Mixed action, but overall no damage done.
THE ECONOMY
GDP doubled expectations as consumers made a continued strong showing (a 3.1% increase annual clip in spending). Business inventories also fell $7.1 billion, the first time since 1991 that the economy did not report a growth in inventories in a quarterly GDP report. That was a real surprise as inventories had been cited as one of the key problems in the manufacturing slowdown. Does not mean Cisco all of the sudden can ramp up production; no, this was more toward overall manufacturing. There are still pockets of massive oversupply in the short term.
Overall, it was a very good number. It is looking backward, however, not forward. The jobless claims are telling the future story, and hand in hand with those are the falling confidence numbers. The Michigan survey Friday showed a reading of 88.4 down from 91.50 in March and below the 89 expected. Job losses equals falling confidence equals slowing consumption in most cases. Maybe the Fed's rate cuts will keep everyone upbeat about better times ahead. So far, they are not buying into it, but we do note that the numbers came out before the last rate cut. Still, jobs give immediate confidence, not the hope of a job in the future. Jobless claims are at recession levels and still coming; looking back at past consumer confidence does little to tell us about what is ahead; for now the trend has been down in confidence.
The GDP price deflator rose to 3.2%, higher than expected and rising from 2% in quarter four and 1.6% in quarter three. That is the whiff of inflation as energy prices and other factors start to push costs higher. The service industry notched a big jump in prices. Prices are rising.
Massive monetary injection is a primary driver of the economy, and that is what we are getting. The Fed has been making money in the back room. Lots and lots of it. That leads to economic expansion because what the Fed does is basically create money by buying government securities. It puts the money to pay for them by making a deposit in a commercial bank. Voila. Instant reserves to loan on. The banks go out to find borrowers and that money hits the economy. That can lead to a problem if it gets out of control, but it is also a surefire way to get the stock market moving higher.
Big runs in the market (1998 and 1999) have been fueled by massive increases in money supply. The Fed this year has injected more money into the economy than it did in the 1998 Russian meltdown; the Fed is pulling out all stops to save the economy. We said in November, December, and January that the Fed would drop rates, and that it would keep doing it until things got better. It always does this just as it keeps raising rates until things get really bad. Moreover, as we have also said time and again, Greenspan wants to protect his legacy. He wants one more accolade, one more feather in the cap, before he leaves: 'Man, he really saved us from recession back in 2001!' We can hear it now.
So, that looks good for the market shorter and medium term, but the thing that has made this economy so strong is low inflation and no intervention. The GDP deflator is somewhat ominous; some are saying it is a hangover from last year, but higher energy prices are in fact starting to hurt everyone. It is critical to keep inflation down, and the best way to do that is to encourage investment in the supply side of the economy through tax incentives. We could seal the deal on another 20 years of economic growth if we get a real tax cut that gets front end loaded. Unfortunately that is not going to happen, and we run the risk of all of that money chasing fewer goods before the manufacturers can get back onto their feet and start meeting demand the extra money brings.
Do you feel more confident? We like the prospects for the market in this climate, but we are concerned about the macro view. The market has done well because of the massive investment in technology invention driven by the 1981 tax cuts. We need to maintain that same kind of environment to obtain the same results for our children. Yes, that is how far-reaching the decisions we make now are. Talk to your Congressmen. Let them know that you are informed and want them to do the right thing for the country, not the party.
Deflation anyone? Not now. We were concerned, but as noted last week, commodities have been stabilizing. The long bond is now back on top where it should be. Reports from our sources say that the lumber industry is on an upswing, having some of its best weeks ever. Lumber is a commodity just as are crude oil, heating oil, corn, hog bellies, and yes, frozen concentrated orange juice. These markets are picking up, and they are very economically sensitive. They have stopped the freefall and that is a very clear indication that economic activity is perking up. The key will be if it can follow through. More insight: the building boom has been fueled by low lumber costs and builders have huge profits because of that. Builders have been feeding on the low prices just as petrochemical plants made huge profits when oil was $8 per barrel in the 1980's. One industry feasts while another suffers. We like the fact that deflation is not as big a consideration to worry about; but, we don't like the higher deflator on the GDP either.
THE MARKET
Overall market stats:
VIX: 27.77; -1.80. The VIX cracked below 30 again and is now starting to show a potentially lower level of anxiety. No real problem as it gave us three readings over 40 in March and April, and that helped set the stage for the rally trying to assert itself now.
VXN: 71.30; -7.12. Now we are seeing more of the relation we would expect: volatility falling as the Nasdaq moved higher. It was a massive drop on a fairly quiet gain. This indicator is still so new it is hard to read this move. It is as if the indicator was caught on a nail up at 79 and was stuck even as volatility should have been easing. Friday the nail gave way and it fell to where it should have been all along.
Put/Call ratio (CBOE): 0.63 (+0.05). Modest rise on an up day. Cannot take much from it as overall activity on the CBOE fell to 902,000 (1.118 million Thursday).
NASDAQ: Trying to move higher, but no volume and facing the 50 day MVA. Still in a fairly tight range.
Stats: Up 40.80 points (+2.0%) to close at 2075.68.
Volume: 1.801 billion shares (-8.5%). We anticipated a lower volume Friday, but were then disappointed the GDP numbers did not generate more buyers. 1.197 billion upside shares to 536 million downside shares, another flip-flop from the previous session, but not strong volume either day.
A/D and Hi/Lo: Advancing issues grew their lead (they were up even on Thursday's drop) to 1.7 to 1 (1.23 to 1 Thursday). 109 new highs (-10) versus 24 new lows (-24).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq continues its stalemate just below the 50 day MVA (2078.05) and above the 10 and 18 day MVA (2029.85 and 1993.72, respectively). It also is sitting right on some prior tops at 2000, a point that it gapped up to back on 4-18 (92 point gap higher) before the Fed cut rates that session. That is where the index is trying to hold above. Friday showed a doji at the 50 day MVA on lower volume. That is an indication the move may be back down from that resistance, but we do not anticipate that it will take out the support, at least just yet. There is a positive building process going on. We think it might retest 2000 or the 10 day MVA and try another run from there. That is based on the consolidation action we have seen the past week, and we are mindful of the two mild distribution days on Tuesday and Thursday. We have to watch for a breakdown on once again higher volume, but there are a lot of positives from our perspective right now.
Dow/NYSE: Friday's gain pushed the Dow into positive territory for the year. Further it was the time the index has closed above its 200 day MVA at the end of a trading week since back on February 16. That level is always a key level of resistance or support, and Friday it improved its move after breaking over that level Thursday on rising above average volume. It is in the midst of overhead resistance up to 11,028, but it is making the right moves now and is not suffering the mild distribution the Nasdaq had last week.
Stats: Up 117.7 points (+1.1%) to close at 10,810.05.
Volume: NYSE volume fell back below average to 1.104 billion shares (-17.4%). Again, somewhat disappointing given the GDP numbers. Up volume declined slightly to 832 million shares, and down volume dropped 120 million shares to 250 million.
A/D and Hi/Lo: Advancing issues continued to lead, improving again to almost 2 to 1 (1.98 to 1). The NYSE A/D line is trying to head to its highs from back in early March. If it can breakout over that level, it would confirm any further move in the Dow and S&P 500. New highs fell to 162 (-15) as new lows fell to 10 (-8).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continued its move over its 200 day MVA, a welcome sight after it finished well off of its intraday high on Thursday after bumping up against resistance. Friday it was able to put some distance over 10,750, and is just about to set its sights on 11,028 (10,850 could be some trouble as a previous interim top). That is the problem at this point: nothing but overhead supply in front of the Dow after a 10 month trading range gave way to a double bottom plunge. It is in the teeth of it now and if making headway. Don't be surprised, however, if it moves a bit higher and then has to come back to test 10,750. It is a hard climb back up, and it will take frequent rest stops. For now it is showing decent (not great), price and volume action.
S&P 500: The big caps were up on a move of their own Friday after bouncing down from resistance on Thursday, closing well off of its intraday high that session. That close gave us a good bit of concern, so we were glad to see Friday's move even if it did occur on lighter, below average volume. Once again, however, the index is right at 1260, and there is some pretty stout resistance from a December low and two interim tops in late February and early March, not to mention the October 1999 low. It needs to breakout of this logjam and do it on some strong volume. Friday's below average volume attempt is not going to do it. This is its second shot at this resistance. It may have to regroup and make another run at it. That could put it back to the 50 day MVA (1214.95) where it would mount another run. Either way, we are looking for it to clear 1270 on strong, above average volume.
Stats: Stats: Up 18.53 points (+1.5%) to close at 1253.05.
Volume: NYSE volume faded to 1.104 billion shares (-17/4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Another big week of economic numbers. Personal income and spending on Monday, along with the Chicago PMI. Tuesday we have auto sales to tell us if the consumer is still making long-term commitments. That day also gives us the NAPM, and we will be able to see if the falling inventory levels are helping the manufacturing sector. Factory orders Wednesday, the new jobless numbers Thursday, and the monthly employment report (rearview mirror indicator) on Friday. Whew. That will keep things interesting.
Now, what will all of this show us? The GDP was way ahead of what we thought it would be. Inventories failed to grow for the first time in 10 years. That is very good news. New jobless claims continue to climb and sentiment continues to fall. That is bad news. All of these reports will be looking back. It is good if things were stronger than we thought. That means what appears strong today may be stronger and what appears to be weak today may not be as weak. Great. If jobless claims would just start to pullback for two weeks running as they were early in the year, we would be much happier.
To us the keys for the year are as follows: money supply is really expanding; commodities have stopped their slide and are stabilizing; the interest rate yield curve massively reversed recently; and there are tax cuts coming. That is the recipe for economic growth, and that means higher stock prices. We may have some shorter term tough sledding as we work through some more reports (earnings and economic) and the market makes its final adjustments prior to another bull run.
Of there being another bull run starting this year we are certain. Bold talk and we may eat those words, but we have seen the signs thus far and we are seeing some leading stocks breaking out, and they are names you will recognize from the Daily, SSR, and TTR: e.g., NVDA, GENZ, CHIC, HOTT, ACS, BRKS. The expanding money supply, commodities prices and other factors point to this as well. The key is the economy re-starting soon enough to get people back to work and get them buying again.
So, this week we are going to continue to seek out the breakout play, those pre-announcement splits, and pre-splits starting their runs. We want to keep it as simple as possible, letting our stocks hit the buy points or starting their momentum moves (pre-splits) and getting on board. Still using stop orders to protect the downside because we have not seen that big volume move to the upside yet to push the stocks out of the stalemate last week. If we get some interim weakness after Thursday and Friday's moves we will wait patiently. We will only jump on the downside plays if there is a major breakdown below the support levels.
Support and Resistance Levels
Nasdaq: Closed at 2075.68.
Resistance: 50 day MVA at 2078. Then 2250, then 2290 to 2300. It is very congested in this range (thicker ice).
Support: 10 day MVA (2029.85). Then 2000 and the 18 day MVA at 1993.72. Then 2000.
S&P 500: Closed at 1253.05.
Resistance: 1260 to 1270.
Support: The 50 day MVA is at 1214.95. The 10 day MVA is at 1221.69.
Dow: Closed at 10,810.05.
Resistance: Real congestion from 10,750 to 10,900. Then 11,028.
Support: The 200 day MVA is at 10,615.84. Then 10,450.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-30-01
Personal Income, March (8:30): 0.5% versus 0.4% prior.
PCE, March (8:30): 0.2% versus 0.3% prior.
Chicago PMI, April (10:00): 40.0 versus 35.0 prior.
5-01-01
Auto Sales, April (0:00): 6.4M versus 6.4M prior.
Truck Sales, April (0:00): 7.5M versus 7.7M prior.
Construction Spending, March (10:00): 0.2% versus 0.6%.
NAPM Index, April (10:00): 44.0 versus 43.1 prior.
5-02-01
Factory Orders, March (10:00): 1.4% versus 0.4% prior.
5-03-01
Initial Claims, 4/28 (8:30): 390K versus 408K prior.
NAPM Services, April (10:00): 50.2 versus 50.3 prior.
5-04-01
Nonfarm Payrolls, April (8:30): 25K versus -86K
Unemployment, April (8:30): 4.4% versus 4.3% prior.
Hourly Earnings, April (8:30): 0.3% versus 0.4% prior.
Average Workwee, April (8:30): 34.2 versus 34.3 prior.
SUBSCRIBER QUESTIONS
Q: I'm not sure if this is whom I should be writing to, but I have to ask. I'm a new subscriber and I started getting into the markets just after it peaked. What has caused this bear market of such dramatic proportions? What are the signs that it is rebounding? Should I be waiting for the tax cut that is still being promised? How should I set up my investment strategy? If these are things I should be asking a broker, let me know, but you guys seem to be the brightest of the bunch out there. Thank you.
A: Thank you for the compliment. The cause of the bear market was a perceived weakening in earnings due to future slowdown in the economy. The stock market is driven by expectations of growing earnings, usually looking at least 6 months into the future. When earnings are not expected to grow, stock prices come down as investors take out those future earnings increases from the stock prices. They are not as valuable without those expectations of future earnings. The Fed raised rates for over a year. On top of that it pumped billions into the money supply ahead of Y2K. That went into the stock market because banks found no one wanted it. Big, big market run. In March 2000, the Fed called the loan. At the same time it had almost finished its rate hikes. Double whammy. The market started to tank. After a summer rally, energy prices spike. Triple whammy. New plunge down. The Fed made some serious monetary blunders that pumped up the markets too fast (Nasdaq 50% above its 200 day MVA? Unheard of.) and then yanked it all away at once on top of tightening the remainder of money supply to a trickle to tilt at imaginary inflation. The economy was choked and the market knew it. It started down and is just now trying to get back up.
Signs of rebounding are the follow through we discussed in March, and now we are seeing leading stocks breaking out of strong bases. Those are solid signs of improvement. The tax cut is already being factored in. It is considered a done deal by most of the market. Investment strategy: we believe in following leading stocks and strategies that give us an edge: solid patterns, stock splits, pre-splits, and solid earnings and revenues. That is a sound strategy.
End Part 1 of 2
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