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us stock market, trend trading stock
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8/23/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: PMTI
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:
- Large caps fail their breakout attempt, end the week back on the range once again.
- Treasuries, dollar and Intel.
- Big financials lagging as the breakout attempt has to wait another day.
- Subscriber Questions
Intel increases guidance. It's a breakout, it's a rally, no its another false start.
Futures were flat when Intel, after hints that things were a bit better earlier in the week when its CEO noted PC sales improvement, announced it was raising guidance on revenues and gross margins. Nasdaq futures shot higher, up 22 points. The market was ready to break the breakout wide open and put some distance between it and the July highs, or it was going to gap higher and then give it back as strong gaps after runs higher sometimes do.
It turned out to be the latter. After the Intel news was pondered, scrutinized and slobbered over the market reverted back to where it was before the announcement. The buyers vacated and the indexes started to slide. Even when Nasdaq, DJ30 and SP500 were still positive after peaking the A/D line was negative as small and mid-caps were down from the start. It was a large cap rally, and the large caps could once again not hold their own. Without the smaller caps to hold the line the chips were left all alone and they could not stem the tide.
The action was the worst kind, that same old rally at the breakout stage that reversed and fails. This is the same action DJ30 showed in late July when it tried to make the breakout on strong trade and then reversed. That move set off a test of the bottom of the trading range. Friday it was rallying well, moving well out of the range only to reversed and close back just inside the prior trading range on an even stronger volume surge. Nasdaq was similar, giving a little 47 point swing high to low and finishing back inside the range. The SP500 never even made it out of the range before it turned over and thudded back. SOX, a key indicator on this move, showed a big doji; it raced higher and then gave almost all of the move back.
DJ30 volume was up, but with INTC putting in 120 million shares on its own, that increase is not totally an accurate measure of the action. As for Nasdaq and SP500, volume was lower, about the only decent news out of the session. That means no distribution, i.e., institutional (big money) dumping of stocks. Thus the market has a decent chance of holding at the near support as discussed earlier in the week. A higher low there sets up another run at a breakout.
Always in the background, however, is the time of the year. In the past, mid-August runs fade and then turn into September selling. A nice and mostly unexpected continuation of the run this week as the indexes tried the breakout move made for a solid 2 week run up off the 50 day MVA. Then a reversal on rising volume just as it looked as if the breakout was going to take hold. Instead of breaking the bonds of gravity from the July highs, stocks came crashing back to earth. If selling volume picks up, something that did not happen Friday, this could be a precursor to the start of a September slide. It seems so pat with so many talking about it, but you can only do what the market indicates. For now it is still holding up but is struggling to make a real breakout. We have really tightened up the stops accordingly, preferring to take a small gain or get out flat, and if we have to buy back in we can live with that.
THE ECONOMY
Many signs of economic improvement being ignored or not understood by the masses.
Intel was the latest to indicate business is improving, and that followed JWN, an old and dusty retail store, blowing out earnings Thursday night. There was Staples upping guidance for the year based on strong small business purchasing. NTAP said it saw a spending recovery. FLEX said its sees positive signs in contract manufacturing. The company news is good confirmation of the improving economic data we have seen the past three weeks as well, the most recent being the surge in the Philly Fed August report.
That is lost on most of the country apparently, as sentiment reports are mushy, fading back from stronger levels in June. This is exactly what happened in 1991 and 1992. There were clear, present, and rather normal indicators that the economy was improving. The first Bush presidency failed to drive this point home while the recession was grossly mislabeled as the worst since the Great Depression by much of the media. The same themes are present again with a recovery underway but many in public office living in the past and grousing about jobs lost as the worst ever.
Despite all of the naysayers, the tax cuts are working. It was estimated the market would rise 10% on the dividend tax cut. It has done much better than that, and we know it has had an impact because dividend paying companies, those cyclical stocks that are touted everyday on Bloomberg, CNBC, et al, have shot higher since passage. Even more importantly, small businesses are spending again as noted by SPLS, the Q2 GDP, the ISM (manufacturing and services), and regional reports. Small businesses produce 70% to 75% of the jobs in the economy. If small businesses are confident enough to spend again on equipment, that means business is better as finally being admitted of late by publicly traded companies. With all of the scandals, they are not going to overstate business activity. To us that means jobs are going to be turning up fourth quarter as a natural recovery trend.
There is more than 'just' economic reports and company claims.
Last week we talked about how the bond market, the dollar, and Japan were also showing signs that recovery is underway. This past week the dollar continued its rally against the Euro. The news out of Europe is as bad as the news is good out of the US. Italy slides into its first recession in 12 years, Germany is in recession, and the rest of the EU is wobbling. There are some who will say that is bad for the US, that we need Europe. Europe consumes very little from the US. What is happening that really impacts the US is a recovery taking hold in Japan, Korea, and the rest of Asia. As in the 1980's, they tend to buy a lot of our heavy machinery and other goods and services as they build up their countries. Also remember that back in the 1980's Europe was in the toilet as we shot out of a very bad recession, spurred by a solid tax package similar to the one passed in May.
We have talked about the bond market pricing in increased demand for money in the future as the recovery continues, and that has increased yields. After a big spike they are leveling off. There is another VERY important change occurring: the spread between short maturities and longer maturities is narrowing. The 10 and 30 year treasuries fell this week. The 2 year note rallied 14 basis points. The end result was roughly a 27 point narrowing of the spread. That is historically a positive sign for the economy. It was a great concern when spreads widened in 2001 and 2002 and stayed wide in 2003 though they did not increase further. The concern was because that is a sign of economic weakness. With the deflation fear, the wider spreads were even more of a concern. The recent narrowing of the spread is another market indication of economic improvement.
THE MARKET
The economic signals continue to improve, but the market cannot make the definitive move based on that economic data. The small and mid-caps took off last week, breaking to a new 52 week high. Semiconductors also broke to a 52 week high with a tremendous surge. The Dow and Nasdaq, however, could not make the breakout stick, sliding back into the top of their ranges to close out the week.
The close in itself was not all that bad as DJ30 and Nasdaq could easily hold at the short term MVA, make a higher low and move to another breakout. The small and mid-caps were coming back from their breakout right from the start Friday; their move is not so much a breakdown as a test of the strong break higher. Indeed none of the action was a breakdown, but as noted, it could turn into that given the reversal. There have been other reversals right at the breakout of this range that led to tests lower in the range.
That is the obvious question: a test of near support after not quite having enough to make the breakout stick or a late August slide into a September slump. Thus far the volume has been as it should be: higher on up sessions, lower on down sessions. That pattern continued Friday with volume dipping back as the indexes reversed and finished lower. Without the big money dumping stocks the indexes could make good on the breakout attempt, holding the 10 or 18 day MVA (the Dow is there already) and then rallying from there to make the breakout move. After all, SOX, SP600, SP400, RUTX have already broken out to 52 week highs with strong surges the past two weeks. They are due a rest and came come back to test that move and remain in excellent shape.
The key this week will be watching how stocks and the indexes test support and what volume they show on the way back. We want to continue to see volume contract on the way down as the surest indication that the big money is not dumping all of the shares they just bought. Another key will be the big financial stocks. Notables such as C, JPM, BAC, and WFC did not participate in the upside move last week. More than that, they were breaking down Friday on strong volume. C and BAC smashed through their 50 day MVA on sharp trade. When financial stocks do not participate in rallies, the move in incomplete. When they break down the rest of the market will have a hard time making a further move. The damage was mostly limited to a relatively small pool though they were big names; regional banks, savings & loans, smaller financial services held their solid moves. For the market to really advance it will need them. The market can hold up if the financials are not there, but rallying further is another question.
Market Sentiment
VIX: 20.27; +0.74
VXN: 29.47; +1.19
Put/Call Ratio (CBOE): 0.91; +0.22. Spiked higher on the selling, already back to levels that in the past have sparked interim rallies. During the consolidation, however, it was not as steady an indicator of those pops higher. The indexes don't look ready after closing at the low Friday to turn and run back up just yet.
NASDAQ
Gapped sharply higher but gave it all back and more in a 47 point swing. Not inspiring action.
Stats: -12.23 points (-0.69%) to close at 1765.32
Volume: 1.71B (-1.1%). Volume was still stronger than it has been overall of late, coming in above average. It did back off, so technically no distribution.
Up Volume: 679M (-605M)
Down Volume: 1.02B (+616M)
A/D and Hi/Lo: Decliners led 1.98 to 1. Swapped out with the Thursday advance.
Previous Session: Advancers led 1.82 to 1
New Highs: 309 (-39)
New Lows: 9 (0)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Huge futures gave a huge gap, but the index showed it was out of steam when the gap turned into a dump lower. Nasdaq gave up the July high (1776); it tried to hold that level late, but the last half hour was rough as Nasdaq gave up 10 points and the breakout as well. The index failed to stretch the breakout and now has to try and hold at 1750 down to the 10 day MVA (1735). It needs to find support near that level so it can make a higher low and try another breakout. If it fails to hold at that level it looks like a late summer slide into September.
S&P 500/NYSE
The large caps never made it out of the range before turning over and falling back to mid-range.
Stats: -10.21 points (-1.02%) to close at 993.06
NYSE Volume: 1.294B (-6.64%). Trade backed off to below average levels, about the only positive technical action.
Up Volume: 333M (-597M)
Down Volume: 967M (+526M)
A/D and Hi/Lo: Decliners led 2.2 to 1. Without the small caps providing inspiration the breadth was putrid.
Previous Session: Advancers led 1.79 to 1
New Highs: 249 (-79)
New Lows: 18 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps only made it back to the Thursday high at 1011, never reaching the June and July highs at 1015 before retreating. All things considered, the fact that it never made it out of the range is not bad; it continued to toil in the range on some pretty solid price/volume action. Holding at the 18 day MVA (991) would be great action, but it is already right there. The 50 day MVA (982) is a good spot to hold.
DJ30:
Stats: -74.81 points (-0.79%) to close at 9348.87
Volume: 1.294B (-6.64%)
The blue chips made another breakout run up to 9500, right at the next resistance. That is where they fell once again, dropping to the 10 day MVA on the close. Volume shot up to the highest since mid-July, but Intel trade was huge. DJ30 is back the trading range, but holding right near some support at 9350. A hold at the 18 day MVA (9290) would be solid action, making a higher low and setting up another breakout run. It could easily find 9250.
The Chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
After a light economic week (though positive results), the calendar is full. Home sales, durable orders. consumer confidence, Chicago PMI, personal spending and income. On top of that there are still earnings to come from many retailers. The market showed more interest in the economics last week after an 8 week consolidation, trying that breakout. But it did not take it totally to heart and fell back.
It was a sorry finish to the week where a breakout was thrown back by the large cap indexes. The chips are soaring but ready for a test. Ditto the small and mid caps. This could set up a great opportunity if they hold the breakouts and the Dow and Nasdaq hold the near support on a low volume test and then rally back on rising trade. That sets a higher low and primes the market for another breakout attempt.
To do this the market would have to buck the historical though not absolute trend of selling off in September. The market looked solid last week up to Friday. Friday was not a total disaster either, but it showed a continuing problem, i.e., fear of new highs. Even though it reversed there were not a lot of breakdowns other than some of the big financials. If that spreads to other financials that is a problem for an overall breakout. The chips, another necessary group, are performing well. They may be offsetting each other but again, if the financials continue to drop the market will find it harder to go very far. Thus we have pulled up the stops very tight given the Friday action in the indexes, the breakdown of some big financial names, and the none too coincidental timing of the action. Again, we would rather take a small gain on this last pop higher or get out flat than have a pullback turn into serious selling in a September slump. We can always move back in if it is just a test, picking off good stocks as they test near support and then rebound.
Support and Resistance
Nasdaq: Closed at 1765.32
Resistance: The July intraday high (1776). 1800.
Support: 1760 (May 2002) is some support down to 1740. The 18 day MVA (1721). 1700 (Feb 2002 low). The exponential 50 day MVA (1681). The lower end of the June closing highs (1677 to 1645) held on the last test.
S&P 500: Closed at 993.06
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 (991). The exponential 50 day MVA (982) and 975 (December 1997 peak). 965 (August 2002 peak). 951 (late May high) to the mid-May high (948).
Dow: Closed at 9348.87
Resistance: 9353, the June intraday high up to 9361 the July intraday high. 9500 (June 2002 lows).
Support: The 10 day MVA (9339) is trying to hold. The 18 day MVA (9290). 9250 to 9236, the early June intraday high. The exponential 50 day MVA (9146).
SUBSCRIBER QUESTIONS
Q: Great service by the way - keep up the good work! I am a current subscriber and I have a question which has perplexed me for awhile now.
I have 100 shares LONG of a stock. The stock is currently at 30.00. I place a GTC "Sell Limit" order to sell at 32.00. I also place a market GTC "Stop Loss" order to sell it should it fall to 25.00. I would perhaps consider doing this because I am planning on going away on a vacation for instance. The stock rises to 33.00 and my 100 shares LONG are sold at 32.00 as per the Sell Limit order.
1) What happens to my current remaining GTC Stop Loss @ 25.00 order?
2) If the Stop Loss order remains in force and if the stock now drops to 24.00 for instance, would the Stop Loss order @ 25.00 now be executed and would this result in an unintended (and undesirable) "SHORT" position in the stock?
3) Conversely, if the stock trades below the Stop Loss @ 25.00 price, resulting in an execution, would the Sell Limit order at 32.00 remain and if the stock were to rise above 32.00 then would it subsequently execute and again result in a SHORT position?
A: A GTC or good til cancelled order is typically just that: it remains a live order until it is physically cancelled. Very few brokerage systems tie the two orders together and automatically cancel one when the other is triggered.
Thus if the upper GTC is executed, the GTC stop loss remains in place. If the stock subsequently falls and you have forgotten about the other GTC you could find yourself having sold the stock short. If it is dumping you could find yourself in an unexpected but decent trade. You could also have some margin problems if your account does not have enough cash to cover the sale.
If the lower GTC is triggered, the higher GTC will remain, and if the stock then recovers and rallies, you could then find yourself again having sold the stock short, this time with a rising stock price. Big trouble.
Some systems allow you to tie the orders together. Our full service brokers know to do this automatically. They are full service and make more scratch off of each trade, so part of that is keeping up with GTC's on our positions. With any investment, however, it is up to you to always, always, always keep up with all of your positions and orders on the positions. Use a folder, spreadsheet or whatever works for you, but keep up with all the details. This not only keeps you out of trouble due to an oversight, but it also provides you a log of what you did. You can use it to review your investment decisions and learn what you did right and what you did wrong. Looking at the hard facts and forcing yourself to ask 'what should I have done differently' is a great way to consciously get rid of subconscious bad habits.
End part 1 of 2
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