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us stock market, trading system
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8/16/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: DRL
Buy alerts issued: AVNX; BLI
Trailing stop alerts: None issued
Stop alerts: None issued
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- No volume power, but blackout fails to phase stocks.
- Factory production, CPI continue the string of positive economic data.
- Market continues positive action as it works toward September and the continued rally to come.
- Subscriber Questions
While there is not much to take from the actual market action Friday from a volume or price perspective, what it did not do told the real story. The market is showing the most weakness it has since it dipped in February and March in the first consolidation of the move off the October low. This weakness is manifested in a remarkably orderly 8 week lateral move. When the entire northeast and portions of the Midwest were knocked off line by an apparent freak occurrence in the power grid, the market shrugged it off.
Sure if it had been an obvious terrorist event the market would have taken a hit, but if the failure had occurred before October 2002 the market would have imploded regardless of the cause. The Friday non-event when the financial capitol of the US was shockingly left without power is another indication of the underlying strength in the market. About the only impact to stocks was a rally in power supply businesses (e.g., APCC), power infrastructure companies, and power enhancers (e.g., AMSC in the superconductor business). Instead of using the session to run screaming from the market because of potential vulnerabilities in the power grid investors looked for the opportunities being presented. Short sellers that went home Thursday night feeling good about the prospects were sorely disappointed Friday.
In short the show went on as it was quickly decided Thursday night that the financial markets would open. There was quite a bit of grousing from floor traders about opening the markets at all. To be fair they were concerned about the ability to efficiently clear orders for their clients, but in the bigger picture they were wrong to be openly griping. One thing our enemies want to do is weaken us economically because they know if we don't have the economic power we cannot afford to pursue them and our influence abroad will weaken as well. If the power outage shut down the financial markets in the world's biggest economy, power grids would become an even bigger target than they already are. Friday was as much a statement to our enemies about our ability to cope with adversity and still function as it was about allowing investors to get to the market on an option expiration Friday. It was not a full blown, full force trading session, but if you needed or wanted to get to the market you could.
In sum, the market did about as good as you could expect given the circumstances, and that was not bad at all. There was order, orders were being filled, there was liquidity. The backup systems worked. The only problem was getting all of the workers into the city to their jobs just as on a heavy snow day. That was a raging success.
THE ECONOMY
Michigan sentiment survey blacked out.
About the only thing to cheese up on the session was the Michigan Sentiment survey for August. It was to be released at 9:45ET but apparently because Michigan was one of the areas hit with the power outage it was decided to be released on Tuesday. Maybe the number was on a computer that had no power and no one at the Michigan Sentiment office remembered what the result was. Surely they are not going to factor in the hiccup the power outage caused. Whatever the reason, we were left sitting on the edge of our seats until Tuesday when the Michigan sentiment people can turn their computer back on and retrieve the number.
Industrial production and capacity utilization continue to rise.
Production rose 0.5% in July, easily topping the meager 0.1% gain anticipated. That was the largest rise since a 0.7% increase in January. Factory utilization rose to 74.5% from 74.2% in June, also better than expected (74.4%). This continued slow rise supports the Fed's comment in July regarding 'nascent signs' of a manufacturing recovery. Slowly, and we mean slowly, manufacturing is starting to pull out of its long recession. It was the first to fall and it has been the last to recover. Many will say that manufacturing is a very small part of the economy and not that much of a concern. Well, the business consumer is a significantly smaller part of the economy than the retail consumer, but we have seen how poorly the economy can perform without these 'small' components.
Consumer prices climb slightly, further easing deflation fears, but is that the real problem?
Six weeks ago you could not swing a dead cat without sparking fears of deflation. With bond yields turning sharply higher the past month and signs of economic recovery, that fear has been somewhat quelled. The Fed still says it is concerned about the 'lack of inflation', but it also is saying it sees signs of a recovery in progress. Consumer prices were up 0.2% as expected while core prices rose 0.2% as well, above the 0.1% expected. The gains were in the usual suspects: energy was up 0.4%, medical care rose 0.5%. Prices are improving some but it is still much of the same old story with the same components leading the way.
The economy has walked a very tight line between falling down the path of Japan and sparking inflation. One problem with pumping up the consumer demand side of the equation without getting production ramped up contemporaneously is too much demand with a laggard supply side. That means demand is outstrips supply, more dollars chase a pool of goods that are not growing fast enough. That is the definition of inflation. All of the worry about keeping the consumer strong overshadowed the need to have the ability to meet that demand if it started to rally.
It may be doing that right now with the unexpected spike in July retail sales despite weaker consumer confidence and even before the tax cut money hit the street. Q2 GDP jumped more than expected, and we believe 4% to 5% growth in Q4 is well within reach. If the supply side is not up to the challenge, the seeds of inflation start to germinate. The supply side tax cuts are helping to get the business side moving again. The Q2 GDP report shows continued improvement in business investment already. Hopefully the investment will continue and the supply side will expand to meet the demand.
Will the blackout give the recovery a black eye?
Without a doubt restaurants, air travel, and retailers are taking a hit to end the week and perhaps the weekend if power continues its sporadic recovery. Most predict power will be back on 100% or close thereto, and if that is the case there is little impact on the recovering economy. Flashlight and battery sales won't offset the lost revenues from the weekend, but without more it will not slow the economic recovery down. The blackout caused problems, but it won't impact consumer or business confidence. It concerns everyone that the power grid could go cascading down the chute in 9 seconds, but we also know that the chances it was terrorist related are extremely remote and that once again the system will be reviewed to find and correct problems that caused the failure. We won't get a quadruple redundant system or a 'failsafe' system as some were calling for on Thursday and Friday; the cost would be too great. We will, however, know why it happened and steps and procedures will be taken to prevent it from repeating. That, as we see it, is the extent of the impact except for the congressional hearings that are already promised. That will be the real cost of the blackout.
THE MARKET
The market went nowhere, and as noted, that is not a bad at all. The Dow is bumping up against the top of the 8 week consolidation, still looking solid with its bevy of cyclical stocks holding it up. On top of that the mid-cap index and small caps were back in the lead, up 0.5% and 0.3% respectively. Not major moves, but when the veneer of the large caps was stripped away with a low volume session, it was clear that the smaller issues were being pursued. Techs and cyclicals get the attention, but it is the smaller caps that make up most of the market and what we want to see perform. It has been years since the smaller caps performed worth a darn, and the past two years have been much healthier for the market longer term because they are no longer overlooked. To us that is a sign of real economic recovery when big money is fanning out to buy up and coming companies in anticipation of further and even better earnings growth.
Thus we remain overall bullish regarding the market prospects. The current action is solid as the market fought off the dips two weeks back and returned to the trading range, further working on consolidation of the March to July run. In June we were stating the market needed a consolidation, and it is delivering it now. It is a very good consolidation. About the only problem we see near term is the fact that it is late August, and that leads to September.
August is not the problem; it is usually slow as it is now. September is the problem. It is good that the market did not race ahead and then look over the precipice into September, historically the worst month for stocks. A sharp drop from there could do damage that would take time to heal. This lateral move eases any September dips that occur. In other words, if it has not raced up further without a consolidation and rest, it has more of a foundation to withstand some selling pressure. More than that, it is still set up well for a run in the fall toward the holidays.
In short we don't think the market has enough strength right now to make a breakout from the consolidation range. DJ30 may move laterally a few days and try it again. The problem is Nasdaq and the SP500 as they are not as ripe to move higher and will act as an anchor. This Nasdaq move looks like a mini version of the December to March action, and we think it will make another moved down toward the low end of the range at 1650ish and form something of a double bottom. That takes it roughly to the end of August. From there it bounces and then drifts laterally and lower through September to form something of a handle. Then it is set to make the break higher. That lets it finish the consolidation and the timing is right as well.
Market Sentiment
VIX: 20.2; -0.31
VXN: 29.21; -0.06
Put/Call Ratio (CBOE): 0.53; -0.17. Dipped low, but we cannot put much emphasis on it given the lower trade levels.
NASDAQ
Rising up to 1700, the next resistance level. Friday was basically a throw away session, but again, all things considered that was not bad.
Stats: +1.67 points (+0.1%) to close at 1702.01
Volume: 704.88M (-46.26%). Low volume meant nothing.
Up Volume: 286M (-553M)
Down Volume: 397M (-54M)
A/D and Hi/Lo: Advancers led 1 to 1. Advancers led by 1 measly stock.
Previous Session: Advancers led 1.55 to 1
New Highs: 146 (-15)
New Lows: 6 (-2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq has edged up to next resistance on low volume the past week. A good recovery from the breach of the 50 day MVA (1663) but nothing changing the character. It was a trading range move. It has just managed to clear the June highs (1685) but still has a toppish look with the July peak and lower high to end that month. That is how it looked in December through March as well. The problem with these bearish patterns is that they have to complete and break down just as a bullish pattern has to complete and breakout. We think Nasdaq is going to take another move lower and scare everyone again over the rest of the month but not break down. It will rebound some, move laterally and lower in September, and then be set for a move in the rest of the year.
S&P 500/NYSE
Similar to Nasdaq, the large cap index bounced well from the 50 day MVA breach and has returned to the middle of its trading range.
Stats: +0.16 points (+0.02%) to close at 990.67
NYSE Volume: 562.631M (-52.22%). Low volume all week as SP500 bounced back up from the dip two weeks before.
Up Volume: 299M (-477M)
Down Volume: 252M (-137M)
A/D and Hi/Lo: Advancers led 1.23 to 1
Previous Session: Advancers led 1.59 to 1
New Highs: 142 (-23)
New Lows: 23 (-26)
The Chart: http://www.investmenthouse.com/cd/$spx.html
A series of lower highs since mid June when SP500 hit 1015. Still a nice, relatively flat 8 week lateral move over the 50 day MVA (978) consolidating the nice run from the March low. SP500 moved laterally last week at 990, holding the 18 day MVA (985) on the closing lows. Doing what it needs to do in a very tight range, but we are not expecting a breakout, or at least not really wanting one right now. It needs some more time off to finish its vacation and set up a better upside move after the mean season in September.
DJ30:
Stats: +11.13 points (+0.12%) to close at 9321.69
Volume: 562.631M (-52.22%)
The blue chips are again poised for a breakout, sitting just below the June and July highs (9353, 9361), making the test of the 50 day MVA (9090) two weeks back and then the low volume move up to the breakout point. It has worked laterally the past three sessions below that level but holding up well. It is a very nice pattern, and a few more sideways sessions where it moves back to test the 10 day MVA (9241) and it is technically ready for a breakout. The concern is the approach of September, and a late summer breakout may not have a lot of volume behind it, and it still has to drag Nasdaq and SP500 along with it.
THIS WEEK
Less earnings and more economic data this week with housing starts, Michigan sentiment (second time is the charm), leading economic indicators, and the Philly Fed. The market has been ignoring economic data to this point, but after 8 weeks of consolidating it will start paying more attention as it has worked through some of its demons that always crop up after a strong move. Valuation downgrades start popping up, stocks don't keep racing higher, doubters enter, and scapegoats are sought such as rising interest rates. Rising interest rates are a good thing for an economy in recovery. They indicate that there is a perceived rise in demand for money in the future as the economy recovers. This last round of rates spiking higher was an overreaction to the Fed holding rates lower than they wanted to go and then losing control all at once.
We expect trade to remain pensive this week, now more than before given the power outage that will have investors in even more of a wait and see mood than usual at summer's end. DJ30 will try to make the move, but volume will have to be stronger to sustain any breakout, and we will have to see it happen. It will also have to carry the weight of Nasdaq and SP500 with it.
We have what we believe will happen, what would be a good case scenario, but as always that takes a back seat to what the market actually does. When all of the investors get together they will rule the day every time. In this scenario we continue to look at those stocks in good shape that are already trying to assert leadership. We are building positions in stocks showing good accumulation during this consolidation and are making solid moves higher.
Support and Resistance
Nasdaq: Closed at 1702.01
Resistance: Still right at 1700 (Feb 2002 low). 1740 is next resistance. 1760 (May 2002). 1800.
Support: The 18 day MVA (1691). The exponential 50 day MVA (1663). The lower end of the June closing highs (1677 to 1645) held on the last test. 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 990.67
Resistance: The simple 50 day MVA (989) is still not totally broken. 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: 975 (December 1997 peak) and the exponential 50 day MVA (978). 965 (August 2002 peak). 951 (late May high) to the mid-May high (948). 935 (November and January peaks).
Dow: Closed at 9321.69
Resistance: 9353, the June intraday high, 9361 the July intraday high. 9500 (June 2002 lows).
Support: 9250 to 9236, the early June intraday high. The 18 day MVA (9209). The simple 50 day MVA (9155). The exponential 50 day MVA (9089). 9000 is some psychological and price support that has held previously. January high (8870). The mid-May high at 8743
Economic Calendar
8-19-03
Housing starts, July (8:30): 1.790 expected, 1.803M June.
Building permits, July (8:30): 1.800M expected, 1.817M
Michigan sentiment preliminary, August (9:45): 91.5 expected, 90.9 July
8-21-03
Initial jobless claims (8:30): 395K expected, 398K prior.
Leading economic indicators, July (8:30): 0.4% expected, 0.1% June
Philly Fed, August (12:00): 10.0 expected, 8.3 July.
SUBSCRIBER QUESTIONS
Q: On your recommendations of options, what does the delta mean?
A: Delta is a measure of how much the option will move versus a one dollar move in the underlying stock. For example, if a call option has a 50 delta, that means the option will (roughly) move 50 cents for every $1 the option moves, up or down.
Delta changes as the stock price moves deeper in the money or further out of the money. The deeper in the money a stock is, i.e., the futher a stock runs above a call option's strike price, the higher the option. An option can get so far into the money that it starts to move what is called 'tick for tick', meaning it moves just about dollar for dollar.
In buying options there is a tradeoff between buying more or less delta. More delta costs more money. That means you get more option movement for every dollar the stock moves, but your return is measured by how much it cost. Lower delta options (a strike price closer to the strike price) cost less. A deeper in the money option with a higher delta will help you out some if the stock moves against you. For example, if you buy a $20 strike option on a stock trading at $25 and the stock falls $2 to $23, at expiration your option is worth $3. If you bought the $25 option (at the money) and the stock made the same move, at expiration the option is worth $0. Buying the in the money option with a higher delta provides some safety measure though it is unrelated to what the delta itself will do for you.
We look at different options on each play to determine whether we want to buy more delta or less delta, calculating the return on each one given the anticipated move.
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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us stock market
trading system
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