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us stock market, trend trading stock
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8/19/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: ONNN
Buy alerts issued: ANAD; DRIV (bonus); MRVL (bonus); BHE;
Trailing stops issued: None issued
Stop alerts issued: MIL
MARKET SUMMARY
Smaller caps lead the way.
DJ30 broke out of its range Monday and added a fraction to that move Tuesday, but the real guts of the market are in the smaller issues. Overlooked for years and years and all but forgotten in the late 1990's run, they have re-emerged as a market force. To us it is a very welcome return as they are also typically a harbinger of better economic times. Small businesses are the growth engines of the economy. We admire Jack Welch, but he was dead wrong when he said that companies such as GE provide most of the employment in the country. Moreover, GE does not introduce the new technologies. Those come predominantly from the smaller start ups that have a new or better idea and bring it to market. The fact that the smaller cap indexes are at 52 week highs is a very good indication as to the nation's improving economic health.
Contrast the intraday moves of the large cap versus the small cap indexes. DJ30 and SP500 plodded through very volatile sessions. They ended higher, but had to put on an impressive last half hour to drag themselves out of the red. They moved through 4 distinct legs intraday, 2 down and 2 up. The small and mid-cap indexes (and Nasdaq as well as the other leader) were on steady ascents all session, keeping an intraday uptrend as the buyers kept coming back to the well. On the large cap indexes the sellers and buyers traded punches all session and were dragged higher late as the other indexes continued to rally. Much more stable action indicating a continuing bid to those stocks.
In the end Nasdaq closed right at some resistance at 1760, but it still has to take out the 1776 intraday July high. SP500 closed at some near resistance but it also has to take out its July high at 1015. DJ30 added to its gain but was lackluster. Again, the really impressive moves were in the SP600, SP400 and Russell 2000 as they stormed ahead again to new 52 week highs and closed on the session highs. The large cap indexes are coming around but are still lagging. The smaller cap issues are telling the story of a recovering economy and have started the next leg higher after the 8 week lateral move in the market.
THE ECONOMY
Earnings results supporting the notion that small caps are doing better.
Many investors will continue to be skeptical, but there is economic recovery underway other than continued housing market strength. Several companies reporting earnings Tuesday noted improvements. FLEX said it sees 'positive signs' in contract manufacturing, those companies that take the components others make and then put them together to be sold by another. NTAP in data storage sees a 'spending recovery.' Then there was the telling statement by SPLS in the office supply sector when it increased its 2003 guidance based on small business demand. The seeds of recovery are sprouting as the tax cuts make it truly hard to pass up acquiring new equipment and then expense $100K of it. On the large cap side more and more are offering or increasing dividends based on the change in tax rules. It seems that both prongs of the tax package are doing as intended. If the pickup in small business activity continues, we can see those jobs start to show up toward the end of the year.
Housing starts hit a 17 year high.
July starts rose 1.5% (1.9M), the highest since 1986. Houses continue to be built even as interest rates rise. Based on the bullish comments from housing company CEO's the past year, it is clear they are going to build, build, build until they cannot sell anymore houses. It is a kind of strike while the iron is hot approach, and thus far they have been successful. Materials companies saw their stock prices soar on the news as they too continue to benefit from the strong housing market.
As with all other areas of the economy, there continues to be a vocal and sizable core of discontent about the housing market itself and what it means to the economy. There is the idea that it cannot continue to run higher and higher, and when it stops it will be disastrous for an economy seen as much too weak on its own. We agree housing cannot be the work horse it was in 2001 and 2002. It is an early cycle industry that just so happened to enjoy a boom when rates were at 40 year lows. Cheap money tends to attract attention, and that is what the housing market did in 2002. Now that the economy is recovering it is still doing well. Rising rates, however, will take a toll in the refinancing market as we have already seen.
Permits were below expectations, dropping 2.4% but not tanking. This is another area that has many concerned: you can only build what you have permitted so if permits fall that means housing starts will fall. This is a very volatile number, however, and we saw again and again in 2001 and 2002 how permits would fall a month or two and we were sure starts would fall. They did not. This may be the start of a new downturn in housing starts, but it will have to establish a trend lower before that happens, and the only trend in place for the past two years is up. Thus while the housing market will slow, the degree and how much that impacts the rest of the economy is not as severe as some make it out to be.
Michigan sentiment falters.
Early August readings were lower than expected at 90.2 (91.5 expected) and 90.9 in July. A slight dip that hardly indicates flagging confidence. As we have noted of late, confidence polls are not translating into lower consumption as the July retail sales show and what companies this past week have been reporting with respect to August sales and the increased business activity they are seeing.
Dollar, bonds, stocks showing US recovery.
Lest we get all caught up in just the numbers being reported and company comments, the dollar is rising again, the bond market is pricing in greater demand for money in the future, and equities started a recovery after a 3 year bear market. Smaller caps are right now starting another leg higher, another indicator of economic recovery. Markets are the best gauge of the future. They overshoot both ways but then get back to equilibrium and set up a trend. The trends in these markets indicates a continued recovery in the US economy.
THE MARKET
Very choppy session for the large caps, but the smaller issues were making their own way along with techs, rising steadily all session. Techs did not shoot straight up. Nasdaq struggled when it neared 1760, a level of interim resistance. Many strong movers Monday were just so-so Tuesday as other stocks moved in to fill the void, particularly smaller caps.
The action in techs and large caps did not blow anyone away, and there was griping about a continued lack of volume on the exchanges. Volume was still low compared to June and July levels, but it was substantially higher as stocks moved up. Moreover, Nasdaq volume surged in the last half hour as stocks surged, closing out near average. Very nice volume for a late summer session. As on Monday, there were several leaders moving on volume, but just as many or more moving on lackluster trade. Volume was vastly improved, but it still was not a landslide in favor of the buyers.
Another feature Tuesday was the return of the old phrase 'too far, too fast.' We were hearing that from some on the financial stations, and all we can say is bless them. After 8 weeks in a lateral move DJ30 breaks to a new 52 week high. The small and mid-cap indexes do the same, and SP500 and Nasdaq are trying. Seems that hitting a 52 week high brings out the fear in many. It seems somewhat incredible, however, that a stock or index can spend 8 weeks in a lateral move, trading in a very tight range, then breakout and immediately be branded as having rising 'too far, too fast.' Again, we are glad they are there and hope they continue to voice their discontent.
Not to say that all is rosy. The rally is nice but there is September looming ahead. The smaller caps look to have started another leg but the large caps are not all on board and they can falter at resistance and slide into September before the correction or consolidation really ends. As always the market and the stocks that make it up have to be the guide. Tuesday Nasdaq was leading again along with the smaller issues, and they were moving on the strongest volume in 2 to 3 weeks.
Market Sentiment
Volatility remains low, but remember that 90% of the time volatility does not dictate the trends in stocks. It impacts option prices (and many still have low volatility components) at all times, but with stocks it typically takes a high volatility reading to denote a major change in direction such as when a trend is over. That applies to whether it is an uptrend or a downtrend. Volatility rises when a trend is changing because there is a real fight between the buyers and the sellers to keep or break the current trend. Thus if there is a long uptrend volatility will start to run higher when the trend starts to break down. Same for when a downtrend starts to break apart. Volatility rises at big changes in trends. In the interim there can be up and down moves within the trend that can at times associate with volatility moves. To say that the low volatility levels right now indicate that the current uptrend is winding down is stretching the interpretation of this indicator beyond its useful limits.
VIX: 19.23; -0.05
VXN: 26.5; -0.12
Put/Call Ratio (CBOE): 0.64; -0.08
NASDAQ
Volume surged in the last half hour as the index ran to session highs and closed at near resistance.
Stats: +21.62 points (+1.24%) to close at 1761.11
Volume: 1.732B (+16.5%). Nice increase to slightly above average volume as the techs ran hard to the close. Best volume in two weeks.
Up Volume: 1.249B (-38M)
Down Volume: 461M (+280M)
A/D and Hi/Lo: Advancers led 1.82 to 1. The moves were not as plentiful across the board nor were they as strong as Monday. Many stocks added to the Monday gains, but it was almost a token move. Thus despite the late run and the volume, Nasdaq has not broken the barriers to a new 52 week high.
Previous Session: Advancers led 2.07 to 1
New Highs: 326 (+77). New highs are showing nice increases. Some view that as a warning sign, but in an expanding economy and uptrending market, you want to see expanding new highs.
New Lows: 6 (0)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq has bounced from the 50 day MVA and 1650 and has now returned to challenge the July intraday highs at 1776. The rising volume lends more credence to the move even though the pattern may not be one that screams accumulation. Nasdaq has stumbled more or less laterally for six weeks and then broke higher on rising volume. It struggled twice with 1760, a point of some resistance, and thus it may have trouble breaking out of the range. SOX has finally made the move, however, and that has been a big boost to Nasdaq and will give it the strength to make a good run at the breakout from the range. The timing of this move is still a concern as stocks rally ahead of what is a historically poor month for stocks. We will be cautious of the top of the range, but if stocks continue to make the breakouts on volume we have to listen to what the market tells us.
S&P 500/NYSE
Fighting with interim resistance as is Nasdaq, recovering late to post a gain on rising volume.
Stats: +2.61 points (+0.26%) to close at 1002.35
NYSE Volume: 1.286B (+15.6%). Rising but still below average volume as the large caps move up toward resistance in their trading range.
Up Volume: 889M (+46M)
Down Volume: 397M (+129M)
A/D and Hi/Lo: Advancers led 1.87 to 1
Previous Session: Advancers led 2.04 to 1
New Highs: 291 (+45)
New Lows: 29 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Large caps have yet to make the breakout from their trading range, just now hitting interim resistance at 1003 before taking on 1015 at the top of the range. One of the sectors that is holding the index back is the financial sector. There are several that are trying to form up, but they are not ready to make the moves. Large caps are not all rowing together for a breakout and that is holding them back. Still a very nice consolidation, but it has not converted that into a breakout with the rest of the market, and struggled Tuesday. The main concern with the large caps is if they act as a drag on the rest of the market.
DJ30:
Stats: +16.45 points (+0.17%) to close at 9428.9
Volume: 1.286B (+15.6%)
Blue chips added to the Monday breakout but had to rally in the last hour before they could close positive. Volume was the best of the month as it made the move. Good to see volume run up on the gain but the session was ugly with DJ30 moving back and forth in 4 legs, 2 up and 2 down. HPQ will hurt tomorrow as it missed on its revenue. We will look for a test of the breakout, moving down to 9350, the top of the range given HPQ and if the blue chips cannot get over the choppy trade. Nice breakout, volume increasing. Not bad action as it did not tank right back after the breakout but the trade was very choppy.
The Chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
No economic data scheduled and the market will be digesting the earnings reports released Tuesday. HPQ is the headliner and it missed on revenues, pressuring stocks after hours. Counter to that are the positive statements and earnings from several tech and retail stocks that beat the street and reported things were looking better. After three years of recession followed by the corporate scandals, companies are being very careful about what they say with regard to business. Thus when they start saying things are better, things are getting better.
Given the after hours trade the market looks ready for a slower open. That is just what we would like to see, DJ30 coming back to test the breakout and then rebounding from that level. That would set up more entry points to capture the next move higher. The smaller issues are moving well, and tests of the recent breakouts are excellent entry points.
Support and Resistance
Nasdaq: Closed at 1761.11
Resistance: 1760 (May 2002) is being tested right now. 1800.
Support: Right at 1740 is some possible support. 1700 (Feb 2002 low). The 18 day MVA (1700). The exponential 50 day MVA (1670.06). 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 1002.35
Resistance: 1003, the early June closing high, is being tested now. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: The 18 day MVA (988). The exponential 50 day MVA (980) and 975 (December 1997 peak). 965 (August 2002 peak). 951 (late May high) to the mid-May high (948).
Dow: Closed at 9428.90
Resistance: 9500 (June 2002 lows).
Support: 9361 the July intraday high to 9353, the June intraday high. 9250 to 9236, the early June intraday high. The 18 day MVA (9251). The exponential 50 day MVA (9115).
Economic Calendar
8-19-03
Housing starts, July (8:30): 1.872M actual, 1.790 expected, 1.845 June (revised from 1.803M).
Building permits, July (8:30): 1.780 actual, 1.800M expected, 1.823M June (revised from 1.817M).
Michigan sentiment preliminary, August (9:45): 90.2 actual, 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: When I put in a stop or a stop limit order, does it get filled ahead of regular sell orders?
A: Stop loss and stop limit orders are designed to protect you when positions you own start to fail, but they are rather poor vehicles for doing that. If bad news comes out on a stock you own and it gaps below your stop point, you won't be protected. With a stop loss you basically have a market order in place and will be taken out at the point where the stock starts to trade, and that can be well below the stop point you set. A stop limit won't trigger on the gap below the stop price, but again, it does not get you out where you wanted to sell.
As for the order of execution, market orders always get filled first. Your stop loss is a market order and it will get triggered if there is a trade at your price or below your price. That is why you can get a lower trade than you wanted if a stock gaps below your stop loss poit. Stop limits, as with other limit orders, are filled after the market orders. Today you are supposed to get filled if you place a limit at the bid (selling) or the ask (buying) even on small orders, but with options there is no obligation to do so. There was an 'agreement' to do that, but now market makers do not have to abide by that 'agreement' on orders of 10 contracts or less. In any event, limit orders are filled after market orders, and thus in a fast moving market you may not get filled.
Even with the limitations of limit orders we still use limit orders in our buys on options and stock unless the stock is extremely liquid (e.g., INTC). There are just too many things that can go wrong with a market order, and they usually do go wrong, or so it seems.
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
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