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us stock market, swing trading stock
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8/04/03 Stock Split Report Update
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Stock Split Report Subscribers:
On Monday and Wednesday we issue a market summary and choice plays for the following session. Full reports issued Tuesday, Thursday, and Saturday.
MARKET ALERTS
Targets hit alerts issued Monday: PDLI
Buy alerts issued: None issued. Just nothing quite there.
Trailing stops issued: UOPX
Stop alerts issued: GDW; TYL
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Test of the trading range comes early but stocks rebound.
- Factory orders are latest sign of a steady economic improvement.
- Hard to call it bullish, but breach of near support brings in some buyers.
- Subscriber Questions
Sellers unable to capitalize on a quick run lower.
Over the weekend we were anticipating a more serious test of the trading range, and the market wasted no time getting on with it. The market started soft but then picked up speed to the downside. Nasdaq tried to hold at 1700, sidestepping at that level for 15 minutes, but then it gave that up and quickly cut lower. SP500 did the same at 975. DJ30 held above 9000 one hour into the session, however, and that helped spark a move back up that was slow, long, and steady. Stocks climbed back all session until the last hour when the faded a hair. Volume was mixed but low, breadth was still weak, and excitement was nil. All in all that is not bad given the comeback.
The rally was aided not only by DJ30 holding 9000, but also another rumor that Hussein was dead. Once again the rumor mill was in full force Monday in another light volume session. On top of that, the story that Colin Powell would not serve another term if Bush was re-elected circulated, though that did not have a lot of market implications. Not an official count, but that makes three 'Hussein is dead' or 'Hussein is captured' rumors in the past week. Tell tale signs of a slow, wandering summertime market.
Again, whatever you want to pin the move on, the market tested abruptly lower, breaking near support on Nasdaq and SP500, and then made a very deliberate recovery. The sellers could not take advantage of the break lower and could not keep stocks down. It was not necessarily a show of buyer strength, but it did show the continued stand off as the market tries to work through the recent gains and set up for the next move. That won't be as easy with August and September ahead, but coming out on the other side the market will be in good shape with the continued improving economic data.
THE ECONOMY
Bonds telling us anything worthwhile?
Wow. What a smooth transition between sections. Monday saw another solid economic report, continuing the string of solid expansions in regional and national manufacturing, weekly jobless claims, GDP, durable goods, etc. (we purposefully left off the employment report as it is always lagging). There is a lot of worry about the bond market and the sudden swing higher in the 10 year note and also mortgage rates. Will it stifle the attempted recovery? Will it crush the housing market? Predictions of woe are easy to find.
We indicated over a month ago that a move over 3.55 on the 10 year would start a run higher in yields. That is exactly what has happened as the Fed lost control of rates and exacerbated the situation with its purposeful about face on intervention in the long end of the yield curve (i.e., buying 10 year treasuries). First, the Fed was trying to keep rates low that wanted to rise. If rates can get away, they result is that they swing farther to the other side than they would have without being held back. Pressure builds, it breaks the restraints, the water flows further than it would if it just crept higher on its own. The Fed then said it was ready to intervene in the long end, a typical signal from the Fed that it is planning on doing just that. Bonds rallied hard and the 10 year yield runs down to 3 on that news. Not two weeks later, however, Greenspan answers a question while testifying before Congress and says there is no need to intervene. Bonds tank, yields scream back up, overshooting where they were even before the signal the Fed was going to buy 10 year treasuries.
Thus there is all of this speculation about the yield curve racing higher and what that means for the economy, the housing market, and just about anything else you could imagine even tangentially related. To us it tells an age old story: the Fed was trying to control a market, it worked for awhile, but natural forces were starting to work and go where they wanted to go regardless of the Fed. The Fed made a last ditch effort to gain control again (the intervention statement), realized it overshot the mark as bonds soared. It then tries to take back some of that misdirection, and the market resumes the direction it wanted to take anyway, but it also has more momentum as the pendulum swung hard; that old equal and opposite reaction. Bond yields ran back up and overshot equilibrium. That brought on all the talk about how rising rates would kill the economy.
Now the market is trying to achieve equilibrium. Monday bonds rallied back some, and importantly some key financial stocks reversed mid course, holding the 50 day MVA (C, BAC). Rates are rising because the bond market is pricing in an economic recovery. A recovering economy means more demand for money down the road so longer term rates rise in anticipation. The Fed, as usual, stepped in and disrupted a more orderly rise in rates. Thus we feel the bond market is telling us something, but you have to strip away the Fed's activities that caused the recent wild gyrations. Without that we would have seen rates rise in an orderly manner, maybe another 60 to 100 basis points from here as the top.
June factory orders solid.
June orders rose 1.7%, better than the 1.5% expected and the strongest gain in 3 months. That scorched the May gain (0.3%). The gains were in durables, those supposed to last 3 years or more (2.6%), while non-durables (e.g., clothing) rose 0.7%). Consumers are still intent on buying cars, washers, etc., and as we have seen, businesses are buying more and more as well. In addition, WMT reported July same store sales up a nice 9.5% clip. This is another piece in the puzzle of economic recovery that points to a positive second half.
Is this recovery really different?
While there are more recovery converts, it is still chic to say that the economy is not going to pull out of this downturn. One thing you hear and that was repeated Monday after the close on some of the financial stations was how this recovery was 'very different' from other recoveries in the past. One thing we have seen in our years in the market and in viewing the economy is that there are wrinkles and twists in every cycle, but recessions and recoveries have repeating themes and attributes. Just as when you hear floor traders and analysts saying this time things are different or that the old indicators don't work anymore you can pretty much bet a turn is coming, when it is accepted to say that this recession or this recovery is different from others you can bet that the recovery is already underway.
Over the weekend we went through some of the reasons the economy appears to be recovering even as debate rages about whether it is happening (e.g., the 'jobless' recovery this time is turning the jobs market even faster than the 1992 'jobless' recovery). Remember that history shows again and again that the argument about recovery goes on long after the actual recovery starts. The markets start their moves while the issue is still undecided just as it has done this time around. Now that the market is in a soft spot (hate to use that Greenspan phrase) just at a time when the Fed has roiled the bond market there are many pundits jumping on this as a sign the economy is still all jumbled up. Maybe they are right, but looking back at past recoveries and the indicia of the same, this one looks to be heading in the right direction. We would rather bet on historical themes that have repeated many times over than a 'things are different this time' scenario. Maybe that is simple minded, but the simple approach is most often the successful approach.
THE MARKET
Nasdaq and SP500 pierced near support but did not violate the bottoms of their trading ranges on the lows. Then the market marched steadily back the rest of the session, just missing a positive close across the board. It was no great shakes of a session, just another day in a trading range that was tested as expected, and survived that early test.
Sellers had their way, pushing stocks below the near support, but they could not push them further. While the financial stations were saying that this was driving the shorts crazy, what most likely happened was that the short term sellers covered or took their gains on the breach of the near support. They are playing the range, and they know there are not enough sellers to really rout the market right now. So when stocks sold sharply toward the next support level they started to take gains. That helped spark the move back up. That did not, however, keep it going all session. There were a few bargain hunting buyers that stepped in and kept the indexes doggedly on the path back up after that first hour of selling.
This was hardly a key reversal session. Small and mid-cap stocks were not participants, rebounding some but closing negative for the session. The indexes could very easily head lower again to test the lower reaches of the trading range before starting back up in the range. We don't feel this was the last test the indexes are going to give in this trading range, particularly with August upon us and always fun September following. The market is, however, showing continued solid consolidation action even after that failed breakout attempt last Thursday. Equal and opposite effects, right? It tried to breakout and reversed, and now it tried to breakdown and reversed. Still at equilibrium with neither sellers nor buyers able to mount a sustained campaign.
At the same time we remain impressed with the semiconductors as they hold near the top of their range and show excellent relative strength. May be the last hurrah before falling flat, but the individual patterns are quite nice and show continued accumulation as the market works laterally. It is about time for the chips to lead a rally. Maybe they won't do it before September, but they are putting in the groundwork for such a move.
Market Sentiment
VIX: 22.65; -0.13. Volatility has moved up but it is hardly near a point where you could say that stocks would move up. If anything volatility is very low and a drag on the market.
VXN: 32.65; +0.17
Put/Call Ratio (CBOE): 0.93; +0.02. The ratio remains at the higher end that has sparked minor upside moves. As it is coincident with the test of lower support by Nasdaq and SP500, it supports a move back up in the trading range.
Nasdaq
Tested the June intraday highs and then rebounded nicely to close over the 18 day MVA on rising though still very low volume. Just missed a positive session though that meant little.
Stats: -1.56 points (-0.09%) to close at 1714.06
Volume: 1.581B (+5.63%). Rising though still below average volume on the rebound. No major buying as techs made the turn back up.
Up Volume: 944M (+348M)
Down Volume: 614M (-274M)
A/D and Hi/Lo: Decliners led 1.44 to 1. Breadth improved but it still shows how small stocks lagged even as the large cap techs that move the index turned off their lows.
Previous Session: Decliners led 2 to 1
New Highs: 110 (-31)
New Lows: 14 (+7)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Sold quickly down to the June intraday highs (1685 (1677 on the close) but then reversed at that point to close just over the 18 day MVA, right where it started. The candlestick pattern shows a hammer doji, a pattern with a long tail where the sellers pushed stocks lower and then buyers came in and pushed stocks back up. That often is associated with a move back up. There was not a lot of strength upside so if it can capitalize on this pattern it will most likely just give it a bounce up in the trading range.
S&P 500/NYSE
As with Nasdaq large caps, the large caps overall broke the near bottom of the trading range intraday, but held the early July low and recovered.
Stats: +2.67 points (+0.27%) to close at 982.82
NYSE Volume: 1.285B (-5.28%). Lower volume on the reversal. Good to see selling on lower volume, but the light volume on the way back up indicates the buyers were not swarming back in.
Up Volume: 598M (+238M)
Down Volume: 677M (-310M)
A/D and Hi/Lo: Decliners led 1.78 to 1. Was much worse (3:1) but recovered as the market recovered.
Previous Session: Decliners led 2.53 to 1
New Highs: 66 (-11)
New Lows: 104 (+23)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Sold quickly in the first hour as well, testing near the July intraday low (962) as it hit 966 and rebounded. When the trading closed SP500 had picked up a couple of points and moved back over the 975 price support and 50 day MVA (977). The move was on lower volume, indicating it was no watershed event. Basically the sellers took a shot at running stocks lower and then covered some as some buyers stepped in as well. We don't anticipate much of a slingshot effect as the index still has to clear the short term MVA (987 to 989) before even thinking about moving higher in the range. The large caps are not done with this test yet.
DJ30:
Stats: +32.07 points (+0.35%) to close at 9186.04
Volume: 1.285B (-5.28%)
The blue chips started higher in the range than the other major indexes, so when they hit the lows Monday they were still over the near support (9000) and well above the July intraday low (8871). They rebounded into the heart of the range, closing over the 18 day MVA but just below the 10 day MVA (9188). On the high DJ30 approached some resistance at 9250 (9209). It remains in the best shape though it is well ensconced in its range.
TUESDAY
Most earnings are over but CISCO and DELL are some of the big names left to report. Cisco received an upgrade ahead of earnings; nice to see an analyst with some guts. We know Dell was pushing hard to meet the quarter with reductions on new and refurbished items; a visit to the website shows many of those deals gone.
The next piece of the economic puzzle is released at 10ET when the ISM services for July hits. That may not be much of a mover, however. Expectations are for 58.5 after a 60.6 reading in June. It would have to top June to be have any real impact as investors know that services are outperforming the other sectors of the economy. At some point the continued improving economic news will help send the market higher, but we have to remember that the market has already rallied on the prospect of better economic times; this is merely confirmation of the market's prior belief.
Thus we do not expect much change in the action, meaning not a lot of volume and not any significant move out of the trading range. Stocks are still feeling their way around the range, with sellers trying the bottom and buyers tentatively accumulating positions. That is very similar to what we have been doing. If we see a volume move upside we will start some positions but no dive in head first. If we see a breakdown below support we will start some positions as well. It is very much a stock buy stock market right now while it works through its trading range. Chip stocks keep us very intrigued along with retail and telecom, but while the market moves in the range we will be conservative and want to see volume on buys so we know that the big money is there to support them.
Support and Resistance
Nasdaq: Closed at 1714.06
Resistance: 1740 is first resistance. 1760 (May 2002). 1800.
Support: The 18 day MVA (1713). 1700 (Feb 2002 low). 1685 (June intraday high) and June closing highs (1677 to 1645). The exponential 50 day MVA (1658). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 982.82
Resistance: 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: 975 (December 1997 peak). The 50 day MVA (977) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9186.04
Resistance: 9236, the early June intraday high to 9250. 9353, the June high. 9500 (June 2002 lows).
Support: The 18 day MVA (9169). The 50 day MVA (9035). 9000 is some psychological and price support that has held previously. 8980 is the neckline in the short head and shoulders pattern. January high (8870). The mid-May high at 8743
Economic Calendar
8-04-03
Factory Orders, June (10:00): 1.7% actual, 1.5% expected, 0.3% May (revised from 0.4%).
8-05-03
ISM Services, July (10:00): 58.0 expected, 60.6 June.
8-07-03
Productivity, Q2 (8:30): 4.0% expected, 1.9% Q1.
Initial jobless claims (8:30): 395K expected, 388K prior.
Wholesale inventories, June (10:00): 0.0% expected, -0.3% May.
Consumer credit, June (2:00): $6.0B expected, $7.3B May.
SUBSCRIBER QUESTIONS
Q: Can you discuss how to distinguish between a double top and a consolidation? There are many stocks these days that look like they could be interpreted as either one of these formations. Thanks for your great market savvy.
A: We appreciate the compliment! A double top is a bearish pattern characterized by a stock's or index' move to a high then a move back down, followed by a second attempt at a high that fails, the second try usually occurring on lower volume. That is unhealthy price/volume action which typically can't boost the stock over the previous high. If the stock cannot strike a new high and then sells back down, usually on stronger volume, that may mean a sell-off is coming. This pattern can occur at any time on a run, but often arises after a stock has made a move out of a faulty base or has rallied long and hard and is in need of a rest.
As stated above, a double top is usually characterized by weaker volume on the second move up. This might also occur in a consolidation, but in that situation, price/volume action may be healthy; that is, the stock price might rise to the high on rising volume, then pullback to support on decreasing volume. It may not have the strength yet to break through the highs it is hitting, but if price/volume looks good, the pattern may then evolve into a trading range, which can occur when a stock is trying to consolidate. Stocks can break out of these patterns, which often form during consolidations. The key usually lies in the price/volume action: a second and rather quick attempt to reach a new high (it may even break to that high) that occurs on substantially lower volume is a caution flag. If it occurs after the stock has posted a strong run (50%, 75%, 100%), all the more reason to be cautious. If it then turns over and sells on rising volume, beware. If it snaps near support on volume it could spell a much deeper test.
Another important consideration has to be what the overall market is doing. 75% of stocks will follow the market, so in this time of consolidation, most stocks that are performing decently will likely do the same. Where are support levels--is the stock trading well above its 50 day moving average, or is it still above the 18 day moving average? Is it still riding above a long-term up trendline? All of these are pieces to the puzzle that can help answer the question on the difference between the two patterns. Even though most stocks follow the market, do not ignore the signals form the individual stock you are looking at.
In the current market, for a double top, be sure to check price/volume action and support levels. You want to make sure you get a good enough move down to support levels to make a downside play worthwhile. Typically you want to see a breakdown from any trading range that has developed or a fall through other key support on stronger volume than the prior moves.
End part 1 of 2
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