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us stock market, understanding the stock market
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8/20/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: TSCO
Buy alerts issued: SNWL; SINA; MXIM; ARTG; FFIV; JNPR (bonus)
Trailing stops issued: None issued
Stop alerts issued: DCEL
MARKET SUMMARY
HPQ earnings drag large caps back for a test of the breakout.
We were listening to several different floor traders and reporters today about the action on the floor. Most were laments of the slow action, that nobody was at institutional trading desks, that everyone might as well go on vacation. The picture they painted was a bleak one. Sure overall the action was slower, but it was coming off a nice volume session Tuesday and we were seeing several stocks in good patterns making higher volume moves. Moreover, the intraday action was not bad with the test and rebound. One thing you always have to remember when listening to intraday commentary: the words from the reporters comes from the traders or someone that works for traders. Their lifeblood is volume, i.e., the number of trades. When volume is down they view it as a bad day regardless of what happens. Thus while they griped about low volume and scratched their heads as to why some stocks were running higher on strong volume, we were taking advantage of those moves.
The action was as expected, and given the HPQ earnings miss and the breakout test on DJ30, the lighter volume was a good thing as all indexes but the small and mid-caps finished lower. That indicates that even though the sellers were slightly in control of the action, there were not many sellers, certainly less than the buyers that were leading on Tuesday. Stocks managed to recover off the lows, and though they could not hold the early afternoon gains, they did what was needed in fending off a potential selling bout.
What leadership there was remained in the smaller cap issues and technology. Though Nasdaq finished lower, many name stocks moved up on volume (e.g., EMC) and thus belying the negative close. The continued performance in small caps is a harbinger of continued economic improvement and market improvement. After years of languishing in the shadows of the big dogs, small caps are taking the lead. This is an early economic cycle phenomena just as the move in cyclical stocks. You just hear more about the cyclicals because they have more household names (literally). Thus the action Wednesday was solid, and while the breakout test may not be over, it was a good start.
THE ECONOMY
Chip sales, airline revenues, and increasing top line earnings.
There were no scheduled economic reports, but there was a lot of data hitting the street Wednesday, and that data continued to show overall improvement. The semiconductor industry had some decent news in the book to bill report, showing increased demand in North America. Sure there were many finding fault with this, worrying about weakness in Europe and elsewhere. These people are just as quick to ignore what appears to finally be a real recovery taking shape in Japan after 12 years of depression. That 'recovery' is of course relative to the depths it sank, but the Nikkei is showing strength it has not had in years. Financial markets are the best leading indicators, and there is a faint glimmer of promise coming from Japan and Asia as well.
In addition July airline revenues were up 8.1%. That was a big surprise to most airline analysts. The rising numbers means that analysts were caught flat-footed, but more importantly that business and consumer travel is rising. Just as with any data there are a dozen ways you can argue around what the results show, but this is another piece of the puzzle showing improvement. Of course back when the market was making its move in anticipation of all of this data nobody was sure just what all the pieces were though it was a safe bet that they were in bad shape. Day after day improving data hits the wire as the trend of improving economic data continues.
Then there are the continued improvements in company earnings. This time it is not all just cost cutting that made the bottom line look better while the top line continued to shrink. All week companies have reported increasing sales, i.e., top line earnings. Wednesday was no different with Talbot's and Petco both beating the street and doing so on improving sales. SPLS just raised its guidance Tuesday on an undeniable improvement in small business spending. The rising top line is not just limited to a few sectors but is showing up across the board. NTAP, FLEX and other non-behemoth technology companies are reporting improved business and better results directly related to that increased activity. While each day the financial stations ask the question if there is a recovery underway, the data show that it is already building up steam.
Are rising interest rates going to stall the economic recovery?
In the same breath that the question of whether a recovery is underway is asked, a follow up is also posed: if it is underway, won't higher interest rates kill it? Many are quick to jump in with a 'yes', citing the slowdown in mortgage applications as interest rates rise. They were down again this week, falling 10.8% overall, the lowest level since July 2002. Refinancing was down 12% while new loan apps were down just 5% due to sales that were already in the pipeline. Some argue that if rates rise the housing market goes splat, and the recovery goes down with it because housing has held the economy up.
True, it has helped hold the economy up. It is never, however, a constant and uninterrupted source of economic growth. As discussed before, this sector is typically an early cycle sector, but it has been so hot because interest rates have been so low (40 year lows). That is going to spur anyone to buy or refinance. Remember, one of the reasons the home market was so strong was because people felt there was no other place safe to put their money (the 'nesting' syndrome discussed so often in 2002). Now that the market is trending higher and the economy is improving, there is investment in businesses, investment in America that spreads beyond your doors. Thus it is natural for the housing market to start to slow after an economic recovery picks up speed. It was strong because rates were so low and because other investment areas were deemed too risky. It will back off some and then surge again when the recovery has been well established and incomes rise again and people look for better digs just as they did in the late 1990's.
So other than the housing market, will higher rates hurt the economic recovery? Higher rates can make the cost of borrowing too high and choke off the very investment the economy needs. It can also divert funds from the stock market into savings accounts and other investments that earn returns based on yield. That is what you hear every day but there is no analysis with it. In other words these events can happen, but at what level? Flash: the 10 year treasury is at the same level it was last year when the stock market flashed its buy signals. So stocks started to rally when treasuries were at a level some are calling high today. While you do have to consider that valuations have also risen with stocks and that can limit upside, the rates are still not near levels that would stifle investment in stocks or the economy. In addition, top line earnings are already starting to grow with an economy that as of Q2, the quarter of earnings just reported, was just 2.4%. We expect the growth rate to hit 4% to 5% by year end, and that will grow earnings and thus work to offset any effects higher rates have on valuations.
Remember, there are an infinite number of variables impacting the economy and the market. Many analysts focus on just one area and give it unwarranted weight in the grand scheme of economic impact. They come to conclusions that are markedly at odds with historical cycles of recovery. We say cycles because they repeat again and again. Sure there are variations, but the themes repeat. We see many of the same themes repeating in this recovery. There are wrinkles with the jobs moving overseas, productivity, and the like, but are they going to overpower the recovery cycle that is already underway? They might, but financial markets are not showing that to be the case.
Broaddus is arrogant as usual.
They were almost kissing his ring on CNBC this morning when discussing the recovery and whether the Fed had a credibility problem. As far as the recovery, Broaddus worried that the job market might act to limit the recovery. My what a few years of depression and a crashed stock market can change. Remember, Broaddus is the same ass who in 1999 so callously said the unemployment rate needed to be higher, that more people needed to be put out of work as he harped on the 'too much prosperity' theme the Fed had adopted. It would be laughable but for the incredible hardship it caused millions of citizens who lost jobs and businesses and livelihoods because of the Fed's grossly negligent policies.
The credibility question dealt with the recent deflation statements and the need to buy 10 year treasuries, but it could have applied to the entire inflation snipe hunt of 1990 to 2000. Some said he admitted there was a credibility issue, but if he did it was a left handed admission. Instead he said that he hoped people would recognize that it was THE FED that had brought inflation rates lower over the past 10 years. What arrogance. Inflation was broken in the early 1980's with a pro-growth tax an incentive package that launched the tech boom in the U.S. Interest rates went lower and lower as new productivity and technologies became available.
Now the Fed did have an impact on the inflation rate, but inflation was not a threat when it acted. Its policies managed to crash the stock market and throw us into recession and in doing so threatened the country with deflation (or, as the Fed puts it, a lack of inflation). If you want to call being threatened by deflation bringing inflation down, you can do so, but you can then also claim that a 40 to 0 loss in football as a victory because you learned how to lose. From this interview it was again clear that the Federal Reserve is dominated by highly educated individuals who practice their art in ivory towers with no hands on understanding of business and incentives. It is absolutely insane that the lives and livelihood of millions and millions, even billions, of people can be placed in the hands of 12 pseudo-fortune tellers who, as Greenspan admitted in 2001, were just not sure whether there was inflation brewing or if there was indeed any connection between inflation and a so-called stock market wealth effect. Disband the Federal Reserve and let market forces act. Or, just have the Fed meet and be required to do nothing. Perhaps then they would have a harmless outlet for their need to meddle in our affairs.
THE MARKET
The session started with the DJ30 testing its breakout, and then stocks rebounded. There was no wild upside rush, however, as the larger cap stocks meandered in a range all session, managing to close off of their lows. Techs and smaller cap issues held a better trend, but all stocks came under pressure late in the session and gave back some gains.
Despite that late move, many individual names in solid patterns continued to make breakout moves. The strength of a market is in the leading stocks, and many performed admirably Wednesday as they continued to breakout of bases or continued to run higher on breakouts from earlier in the week.
Still volume was lower and breadth was modest, and the rebound from the breakout test lacked any power. Thus buyers were not jumping right back into stocks. It therefore looks as if the test is not over, and we expect the indexes to continue to test the recent move with taps down to near support.
Market Sentiment
Small increases in volatility on the slight selling. The weekly bulls and bears survey was released and it showed bullish advisors at 55% and bearish 18%. Bulls are too high and bears are too low. Again we surmise that there are millions of investors who were in the market in 2000 to 2002 who were shaken out with big losses and who are not about ready to come back in. That is were some of those trillions of dollars reside. We know several former investors who still have refused to look at the market, instead just commenting every once in awhile that the market seems to be doing better but that it is too risky. That is a healthy bearish population out there still, a population that will have to put money back into the market, however, in order to make enough money for retirement and their kid's college.
VIX: 19.71; +0.48
VXN: 27.64; +1.14
Put/Call Ratio (CBOE): 0.62; -0.02
NASDAQ
Gapped lower and then managed to recover to close basically flat, giving back a modest attempt to move into positive territory. Recovered from the gap lower but that is about all. All in all that is not bad action.
Stats: -0.57 points (-0.03%) to close at 1760.54
Volume: 1.511B (-12.8%). Volume was right back down Wednesday after a much better showing on the Tuesday rally. Not bad given the market basically churned.
Up Volume: 649M (-600M)
Down Volume: 846M (+385M)
A/D and Hi/Lo: Advancers led 1.05 to 1
Previous Session: Advancers led 1.82 to 1
New Highs: 299 (-27)
New Lows: 12 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Ran in place, but ran very slowly. Techs started lower and managed a decent move higher though they gave back half the move in the last hour. Nasdaq rallied to 1768 on the high, still shy of the 1776 level marking the top of the range. It did not have the power to make the break higher and may need a test back to the 18 day MVA (1709) to make a higher low before attempting another breakout.
S&P 500/NYSE
The large caps stalled out at near resistance again, showing a doji on low volume. It too may need a test to the 18 day to make a higher low and then try again.
Stats: +0.06 points (0%) to close at 1000.3
NYSE Volume: 1.195B (-7.11%). Volume was lower but still on par with last week as large caps went nowhere. Lower volume is good as it shows no churning at the top of the range. Churning is high volume with the index making little headway near resistance. That indicates a lot of sellers and buyers exchanging stocks as the big money exits, selling to the latecomers. That was not the case Wednesday with the lower volume.
Up Volume: 602M (-287M)
Down Volume: 577M (+180M)
A/D and Hi/Lo: Advancers led 1.21 to 1
Previous Session: Advancers led 1.87 to 1
New Highs: 233 (-58)
New Lows: 17 (-12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 showed a doji right at 1000, unable to continue the move and try a breakout over 1015. It again is having trouble at this level, the point it stalled out and made a lower high in late July. It is continuing its move in the lateral range, and it looks as if it will test back once more to the 18 day MVA (989). If it can hold there and make a higher low that gives is the foundation to make a move over 1000 to challenge the top of the range at 1015.
DJ30:
Stats: -31.39 points (-0.33%) to close at 9397.51
Volume: 1.195B (-7.11%)
Blue chips started lower and tested 9364 on the low before managing to recoup some of the loss. Volume was lower though still stronger than the prior week. The candlestick pattern showed its second 'loose' doji in a row. After the run up off the 50 day MVA (9126) the past two weeks it looks as if DJ30 is going to test the breakout further, coming back down to 9350. The 10 day MVA (9318) is rising to meet it, and the July high (9300, outside of the spike to 9361) should act as support on any test to send it back up.
The Chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Jobless claims, Leading Economic Indicators, and the Philly Fed are out Thursday. The focus will be on initial claims and the Philly Fed as jobs and manufacturing recover. Great numbers could reignite the rally, but we anticipate stocks will edge back a bit further given the Wednesday action that was weaker but not a hard drop. A nice and orderly lower volume test of that level over the next session or two sets the stage for another break higher on DJ30 and the small cap indexes and a run at resistance on Nasdaq and SP500.
Thus far the action is not bad with a higher volume breakout, a lower volume pullback, and solid stocks still breaking out of good patterns on strong volume. We will be patient and let any pullback run its course and then move in when stocks start making higher volume bounces up off support or breaking out of bases they completed with the short pullback.
Support and Resistance
Nasdaq: Closed at 1760.54
Resistance: 1760 (May 2002) is being tested right now. 1800.
Support: 1740 is some possible support. 1700 (Feb 2002 low). The 18 day MVA (1709). The exponential 50 day MVA (1673). 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 1000.30
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 (989). 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 9397.51
Resistance: 9500 (June 2002 lows).
Support: 9361 the July intraday high to 9353, the June intraday high. The 10 day MVA (9318). The 18 day MVA (9267). 9250 to 9236, the early June intraday high. The exponential 50 day MVA (9126).
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.
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
understanding the stock market
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