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us stock market, stock watch
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5/31/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: None issued. Let many good moves continue to run.
Buy alerts issued: GNTA
Trailing stop alerts: None issued
Stop alerts: TLB
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SUMMARY:
- Strong surge caps strong week.
- Finally a business pickup even as the consumer wanes?
- Market surges in the face of growing concern about the rally.
- Subscriber Questions
Volume surges as SP500 on the brink of a higher high.
The market refused to back off after breaking over the May highs Tuesday when it came back from Memorial Day with a vengeance. As noted at the time, that action following a holiday is a change from the selling mindset that would use the return from holiday as a new selling opportunity. It was not a one-day wonder, either, as the market surged into the Friday close on strong volume.
The Chicago PMI was credited with sparking the Friday surge as it indicated the potential for a quickening recovery in the important business sector even as consumer spending and consumption were flat to lower. Perhaps, but the market was already off and running earlier in the week on the passage of the tax and economic bill. In any event, the index was choppy before the Chicago number hit, but breadth was already stellar with the small caps leading higher early in the session. That breadth only got better (3.4:1) after the PMI numbers hit. Volume shot higher as well as Friday continued the pattern of strong volume on the up sessions. Indeed, volume surged last week, easily topping volume from the prior weeks as it seems the summer doldrums usually kicked off by Memorial Day are not present in this market.
It was a strong week with the indexes taking out the recent May highs and other interim resistance. Nasdaq and the small cap and mid cap indexes all continued their uptrend having broken the string of lower highs. SP500, however, closed the week right at its August 2002 high. It did take out the closing high, but that intraday high at 965 is less than 2 points away. A solid breakout over that level would be a huge boon for the market. As it is, the market made yet another powerful move higher in anticipation of better economic times ahead.
THE ECONOMY
Can the business side actually be recovering?
The data is still mixed. Q1 final GDP showed that business investment dropped almost 5% versus the 2.4% Q4 gain. That, however, is considered old data related to the pre-war slowdown. The Chicago PMI is data from May, and it showed an expansionary 52.2 reading contracting previously (47.6 in April) and better than the 49 expected. That completed a trio of better than expected regional reports and sets the stage for the national ISM report due Monday. Expectations for that report are still for contraction, and that sets up the opportunity for surprise just as the Chicago report.
While prices fell and further stoked some deflationary fears, the new orders index shot up 10 points, well above the 50 level indicating expansion. The Chicago PMI is considered a harbinger for the national ISM. The correlation is not exact, but the trend is there. When the Chicago ISM jumped over 50 in October 2002, the ISM did not crack 50 the same month, but did the following. The Chicago number thus appears to set the trend and the national number follows it with a bit of lag.
Consumer spending falls 0.1% as incomes remain flat.
The consumer spent less in March by 0.1% (flat expected). That is really no surprise as March was the month with all of the war uncertainty, when the nation was living day to day on embedded reporter snippets from the war front. People were at home watching war returns and they were holding back to see just what happened.
That is why the market brushed off the numbers. This was the same action seen in the 1991 Gulf war when consumers stayed in and watched grainy shots of anti aircraft fire slinging aimlessly over Baghdad. The key now is how they respond after the war. Results thus far are not blowout as seen in the weekly chain store sales that Redbook reported down 2.4%.
Michigan sentiment jumps to 92.1 from 86.0 in April.
Below expectations, but still one of the largest increases in the report's history. The big factor was the rise in expectations, up to 91.4 from a meager 79.3 in April. As with business sentiment, consumer sentiment is looking to the future with anticipation.
A business side recovery in the making.
It is clear the consumer is not where it was. Car sales are still decent, home refinancing is at record pace, and houses are still being snapped up though at a slower pace. The consumer never when dormant, but it also never provided the big spending surge that often propels the economy out of recession. It has always been about business, and with the strong stimulus in place (rate cuts, tax cuts, treasury buying), bets are being placed on a stronger recovery around the turn of the year that is led by businesses investing in business once again, taking advantage of the $100K expensing, 50% depreciation, dividend and capital gains tax cuts, and lower marginal tax rates.
There is also talk of even further supply side incentives to be trotted out in September. Larry Kudlow is an insider but claims not to be. He is talking of more depreciation cuts as well as the personal savings accounts to be addressed at the end of summer. The personal savings accounts would be a boon to everyone as individuals could save for anything without immediate tax consequences. That prompts more investment in the US, and that is exactly what triggered the massive technological boom in the 1980's and 1990's that propelled the US well beyond it peers. The administration seems determined to force the issue again to reclaim our prosperity. We have seen the results when it works: high employment, better standard of living for everyone, and plenty of dollars for those born again deficit 'hawks' in Congress to spend on all of their pet projects. They should but won't learn from this last bust that spending should not increase just because the money is there. It should be returned to those that created the prosperity in the first place so they can create even more prosperity and more and more can live the American dream. Success snowballs on itself if left unfettered, and we all benefit from that.
THE MARKET
o Concerns: insider selling, jobless recovery, etc.
o Huge volume week: no summer slowdown
o Real recovery anticipated as result of stimulus & more to come? Small caps, financials
It was a very strong week on all fronts. The point gains were impressive with all indexes clearing the May highs and galloping higher to close out the week. Volume surged Friday on the week as a whole. Even with a short 4-day week, volume easily topped the prior week and its 5 days of trade. As of yet there is no summer slowdown as typically occurs in May and June. Upside breadth was huge, reaching follow through levels as big money moved in and snapped up stocks of all shapes and sizes. Small caps were again the big winner, leading the market higher Friday as small and mid-caps have exploded the downtrend with strong moves over their August highs. Smaller companies tend to outperform large cap companies early in an economic recovery, and thus they tend to lead in market rebounds that anticipate that recovery. Their performance the past few months is a good sign for an economic recovery at the turn of the year.
Even with the strong move there are areas to watch. SP500 put in a great weak but it closed right at the August 2002 high. That is an important point as that would break the string of lower highs plaguing it in the downtrend. Nasdaq has to deal with gravity. It is not far from 20% over its 200 day MVA (1635), a point where it historically starts to correct. There have been aberrations in the past, particularly during the late 1990's when it could run 25% over the 200 day without losing stride. Maybe it can do that this time as well, but there were other forces at work back then. Suffice it to say there will be something to watch at that point and paying attention to the price/volume action at that point as well as the leaders will clue us in to the direction.
In short, other than potential problems ahead, there is nothing in the fundamental indicators of price/volume and leadership to indicate the market is even approaching trouble. That means we keep our eyes open for trouble developing, but we don't fight the tape by inventing problems where they may not even exist. Heck, the Fed did that back in 1998 and 1999 and look at what happened: they feared inflation so much they made sure it could not happen. You want to avoid inventing boogey men because that impairs the ability to take advantage of what the market is giving. There is going to be a pullback after this strong move runs out of gas, but there is still upside even within conservative historical comparisons.
Market Sentiment
There is a lot being said about market bullishness and how that is adverse to a continuing rally. As we pointed out Thursday, there is almost another type of contrary sentiment indicator now: those that are contrary to what the overall sentiment is perceived to be. One thing that many are missing: the retail investor is still not in this market. We have talked to many groups recently and the predominant comment is 'gee, the market is doing a little bit better now, but it is still too risky.' 20%+ moves in the indexes and 100%+ moves in individual stocks is 'a little bit better.'
The point: the retail investor abandoned the market in the long downtrend, and as is usual when the market turns back, the individual investor is very slow in returning. The first real rally is not going to bring them in. They want to see sustained gains so they can be sure and follow history and join the party late. There is some money trickling back into stock funds, but it is a trickle as uncertainty and still fresh wounds from the 2000-2001 collapse dominate where funds are directed.
The script written by history is being followed. There are lots of analysts nervous over insider selling, too many bulls, a jobless recovery, etc. As for sentiment indicators, it is all a function of relativity. Many investment advisors are bullish and those retail investors that are back in the market are bullish. The pool they are preaching to, however, is growing very slowly as the retail investor is not rushing back in. That money on the sidelines is coming in ever so slowly, and that is providing enough to keep the rally going but not shooting higher and burning out. The concern is that you run out of ammunition in a big rush. The market is not really doing that; as long as enough are being converted to keep some money coming in, the market can rally, consolidate, rally, and consolidate as it keeps working higher.
Insider selling is a very poor historical indicator of market moves. Corporate executives are historically negative about recoveries. They don't see a recovery until things are back to where they were before the slowdown. That is not the true indication of when a recovery starts. This mindset, however, leads to the surge in insider selling that occurs when the market starts to price in an economic recovery. The executives don't see the recovery yet (the market looks well in advance; by the time the numbers hit the market has already started its run), but they do see their stock price rising and hitting levels it has not hit in a long, long time. Much like the investor that sells just before a breakout in order to 'get even,' corporate executives see the stock price rise without a real pickup in business as a chance to get back some of the losses and book the gain. They start selling even as the market continues to price in an economic recovery and the economy chugs along toward that recovery. Thus the increase in insider selling we are seeing is absolutely nothing out of the ordinary. It is just humans acting in a very human, emotional way as they are afraid to let the 'last chance' get by them.
What about this jobless recovery? How can the market possibly sustain itself in the face of lingering unemployment? Where will the money to invest come from if joblessness is high? That is another myth that adds to the contrary contrary sentiment we see. History shows that the employment rate has no impact on the market. In 1991 the market bottomed even as unemployment rose for the next year after the recession was officially over (looking in retrospect, of course). Remember: the market looks ahead and not at the current situation.
That applies to the unending list of worries heard over and over during the tax cut debate: budget deficits, deflation, weak dollar, terrorism costs, higher interest rates, etc. There is a continued uncertainty about the future. Reading reports last week and this weekend, there is the underlying theme that economic recovery is not certain. CNBC's Steve Leissman said as much Friday, and if he said it on television, it must be true. The market rallies ahead of the worry, and it always, always, always (always) seems different this time. Just as the kids today seem to be further out of control and crazier than we were and their music is more vile and degenerate than ours, the current economic client is surely the worst since the Great Depression. The point: ignore the emotion and watch the market.
VIX: 21.7; -0.79
VXN: 31.66; +0.24
Put/Call Ratio (CBOE): 0.67; -0.23
Nasdaq
Cleared some more interim resistance, leading the market along with the smaller caps last week.
Stats: +20.96 points (+1.33%) to close at 1595.91
Volume: 2.315B (+4.08%). The strongest volume since November 2002, topping a week of surging volume as the big buyers continued to enter the market on the upside. It is interesting to note that in November that big volume surge came just over one week before Nasdaq topped and went into its 4.5 month consolidation.
Up Volume: 1.67B (+187M)
Down Volume: 627M (-91M)
A/D and Hi/Lo: Advancers led 2.26 to 1. Excellent upside breadth yet again when the real buying volume enters the market.
Previous Session: Advancers led 1.4 to 1
New Highs: 269 (+34)
New Lows: 9 (-2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq ran up to the June 2002 closing high (1595) on strong volume, capping a strong week. It still has to deal with this level, but Nasdaq has cleared most of the serious near term resistance up to nearly 1700. What is going to impact it most now is that gravity as it approaches 20% over its 200 day MVA at 1635.
S&P 500/NYSE
An impressive performance pushed the large caps over the December high and up to the August 2002 peak.
Stats: +13.95 points (+1.47%) to close at 963.59
NYSE Volume: 1.689B (+0.17%). Volume edged higher from already high levels hit Thursday.
Up Volume: 1.294B (+638M)
Down Volume: 363M (-651M)
A/D and Hi/Lo: Advancers led 3.39 to 1. Excellent, follow through-like breadth indicating that all sectors were rising. Combined with the volume it is clear the big money was in the process of buying the market.
Previous Session: Advancers led 1.14 to 1
New Highs: 386 (+78)
New Lows: 5 (-1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
After stutter stepping near the May high the large caps finally broke free and are now on the cusp of making a higher high over the August 2002 high. On a closing basis they did it; intraday they lacked 1.4 points. The significance of the move is break of the series of lower and lower highs in the downtrend as well as a confirmation of the Nasdaq, SP400, SP500, RUTX and about every other index' break (not DJ30 of course) from the string of lower highs. Clearing this level opens the door to the December 1997 high at 975.
DJ30:
The blue chips are being hampered by some laggards, most notably MSFT, as the smaller cap issues outperform the large caps. The index has yet to take out even the January intraday high (8870) on a closing basis. Then there is the December high (9043) and August high (9077). Those are not far, and the Dow is not moving contrary to the rest of the market. It is just lagging well behind it.
Stats: +139.08 points (+1.6%) to close at 8850.26
Volume: 1.689B (+0.17%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
The week kicks off with a bang with the national ISM Monday. As some positive business-side reports helped last week's rally along, this national number will be closely watched. As of this weekend it is not set to reach 50 (48.5) even in the wake of the Chicago number. That leaves room for an upside surprise, but history indicates it will be June before we see if the number can breach 50 again. Then the week ends with the employment report, that lagging report that everyone puts so much emphasis upon. One good thing; the Fed is not about to tighten rates until it sees months of steady jobs growth. Indeed, most expectations are for a cut at the next meeting.
In between the economic reports the market has to find its way after a strong week cleared some resistance and left it at the door of the next ceiling. It has been a dramatic rise with a quick correction followed by another sharp rise. As with stocks, there will be a pullback ahead, one just a few days long, another one longer to consolidate the strong move. Unlike many, we don't see a rally failure coming, just more normal action. After rallies stocks pull back to test. After enough of a move stocks pull back and consolidate a bit longer. We are looking at a point near Nasdaq 1635 as a reference point for a more sustained consolidation. That is not set in stone; it could come sooner if SP500 fails at the August high and the ISM or other news is a disappointment. It could run further if news remains solid and surprising to the upside.
What we do is what we typically do: look for those stocks that have set up well, either ready to breakout of new bases or are testing a breakout and providing some other entry point. Many stocks ran well last week and are extended. Others are setting up for the next wave of breaks higher. After such a strong move an important point remains: pick off the stocks that are providing good entry points and not chasing those that are extended and ready to come right back on you if the market decides it is time to correct back.
Support and Resistance
Nasdaq: Closed at 1595.91
Resistance: 1595 (June 2002 closing high). 1635 (20% over the 200 day MVA).
Support: 1573 (May 2002 closing low). Down trendline from the May 2001/January 2002 intraday highs around 1567. 1567, the mid-June intraday high. The May high (1554) needs to hold any other test. The 10 day MVA at 1546. The 18 day MVA (1526). The December intraday high (1522). The January high (1467). The exponential 50 day MVA (1468).
S&P 500: Closed at 963.59
Resistance: 965 (August 2002 peak). 975 (December 1997 peak). 990 to 1000.
Support: 954 (December intraday high). The May high (948). 935 (November and January peaks). The 10 day MVA (944). The 18 day MVA (937). Price tops at 911 (July) and the 50 day MVA (912). March and April highs (896 and 905). The 200 day MVA (885).
Dow: Closed at 8850.26
Resistance: January high (8870). December high (9044). The August high (9077).
Support: November high (8800). May high at 8743. The 10 day MVA (8694). The 18 day MVA (8637). 8522 and 8520, the March and April twin peaks. The 50 day MVA (8465). The 200 day MVA (8334).
End part 1 of 2
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