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us stock market, trend trading stock
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8/30/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: DRIV; COLT; CRDS; JNPR (took some gain given the doji on the candlestick pattern)
Buy alerts issued: SPIL
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:
- Market completes the move with Nasdaq rising to July high.
- Solid sentiment, strong Chicago PMI (employment included), and evidence of some pent up demand.
- Starting September at the top of the range.
- Subscriber Questions
Seven months up on the Nasdaq, closing at a 16 month high.
Stocks closed out the summer with another gain making it six months up for SP500, seven for Nasdaq. Of course the last three months were a sideways move so it just goes to show that you can do just about anything with numbers if you want to. The Friday action was a microcosm of the market move: shaking off some early dipping, mulling some more good economic data, then rallying to close at session highs. It was a summer of gains and leadership from techs, small, and mid-caps, and they closed it out in like fashion.
Volume was extremely light but breadth on NYSE was excellent (2:1) as those smaller issues pushed higher again. Again, this is the same action the past month, the rallying on low volume though showing solid price/volume action. The market did not sell off in late August as it has a history of doing, instead enjoying a rally with the stocks that brought it this far: cyclicals, retailers, techs, telecoms, internets. Even the financial stocks showed some life signs Friday though they were not breaking higher.
In the end it closed out a very nice week, but also closed the indexes right at resistance. A solid move higher by Nasdaq and the smaller cap indexes has them at closing highs at the top of their recent ranges. Great price moves but the low volume on the way up leaves the question as to whether the rest of the fund managers and investors coming back to the market will find it as appealing and push prices higher from here. The actions of those in the market has certainly been positive, and breakouts continue along with overall good price volume action.
THE ECONOMY
The economy is recovering but it is definitely going unnoticed in most of the print, audio and video media. We peruse many economic websites and what we saw Friday evening was typical: very short blurbs about key economic indicators that continue to improve while long articles proclaim 'labor woes,' failing consumer credit, lower paychecks, and most any thing else related to the job market. It is understandable we suppose, given that jobs are pretty much the lone economic focal point for the average person. The problem with the nightly laments is that it takes the focus off of what is really happening, i.e., the surging economic recovery and a job market that is in fact starting to improve.
Chicago PMI rises again in August, beating expectations and showing increasing employment.
Chicago purchasing managers were more optimistic again with August readings hitting 58.9 versus expectations of 56.0 and 55.9 in July. The production index jumped to 61.6 from 58.4, the fifth consecutive reading above 50. New orders were up for the fourth month at 60.5, a slight dip from 61.7. Chicago, a proxy for the rest of the nation, continues to improve at an excellent clip and that bodes well for the national ISM next week. Remember, it moved past 50 last month again after the regional reports led the way with 50+ readings for consecutive months. This continues to be a great sign of the increasing economic momentum.
Very importantly, the employment index moved over 50 for the first time since March 2000 (52.4 versus 47.9 in July), the time start of the bear market. That is a very strong surge, blowout as some in the Chicago area called it. Still, the employment picture needs more work. The workweek and increased overtime have yet to show up in the monthly jobs report, and that is the harbinger of more hiring. With the falling weekly jobless claims and signals such as the Chicago data for August, however, the seeds of change are there. What mention did it get? It was noted in passing in articles discussing the job market if it was mentioned at all. It is pretty obvious that these articles are going for the sexy stories (that is, the job market woes angle) and were already in the pipeline before the data hit. Heaven forbid real data louse up a story that a reporter has been writing for a week. Problem is that limited focus keeps people, already concerned about the job market, from seeing the real improvement in the economy and thus quelling the optimism it should be generating.
A 3.1% GDP growth rate in Q2 when we had the war slowdown is excellent. The surge in business investment was outstanding news. The jump in final sales and the drop in inventories bodes well for future growth as well. Gasoline prices need to fall, and it would help if the Bush administration would focus on getting Iraq oil production higher instead of trying to maximize the near term profits of its energy connections. While not critical yet, if it goes on long enough the rising oil and gas prices can work to offset the benefits of the tax cuts and tax incentives. The goal here is to get the economy going so it can achieve its principal. The Iraq oil was bumped off the market because of the war, and now it is the administration's duty to get it back online ASAP so the market can work properly and the economy can continue to expand.
Michigan sentiment sags.
The final sentiment ready fell to 89.3 for August, down from 90.9 in July. Present conditions fell as with the Conference Board's reading. Two points. First, consumers continue to increase spending right now despite surveys showing they have less confidence right now. Second, the Michigan reading is still 12 points above its year low in March and its 12 month average. Finally (there was a third point), the Michigan survey covers a whopping 500 families. Quite a cross section there.
Personal spending in July surges 0.8%, June revision doubles gains, incomes rise 0.2%.
This was in line with expectations, but it is a big surge. The reading jibes with the reports from retailers regarding strong July sales. It also bodes well for August as we have already heard from a bevy of retailers raising guidance. A very key element was the June revision to a 0.6% gain from a 0.3% rise. You know there is a change in trend when the past reports are revised higher and higher as more data comes in. GDP earlier in the week and now personal spending.
No pent up demand?
One of the arguments against a strong recovery is that consumers spent all the way through the recession and thus there will be no explosion of buying based on pent up demand. While it is true that consumers continued to spend on homes and 'cocooning' at stores such as PIR, they bottled up in other areas such as travel after 9-11. Last month, however, airlines noted an 8% rise in travel. That is continuing this month, driven mainly by leisure travel. While airlines would prefer to see the high margin business traveler lead the charge, the rise in the consumer traveler shows that the consumer is finally saying 'it has been two years and damn it I want to go somewhere.' That is pent up demand and it is good for airlines, hotels, restaurants, and other travel related industries. Our habits changed some after 9-11, and this latest data shows there is some return to more normalcy. Much is made out of the job market, but consumers continue to consume at an increasing pace and travel is increasing as well. That does not sound like the flagging confidence we hear thrice daily on the news.
That appears to be combining with some improved business demand as the Q2 GDP reports indicate as an economic pickup and tax incentives are prompting companies to invest in more equipment and plants. After three years of no business investment this is an important step and it also appears to be accelerating for now.
THE MARKET
The market pulled off a gain through then end of summer, avoiding the late August dips that often signal the start of the September selling season. Nasdaq has been known to drop as much as 5% in the last week of August. Last week it rose 2.5% and 4.3% for the month to close right at the July high hit the prior Friday. The small cap index also closed at the recent high while the mid-caps rallied to a new 14-month high. SP500 and DJ30 are right at the top of their 3 month ranges. Everyone is all dressed up.
All dressed up at the top. September is starting, the second anniversary of 9-11 is around the corner and Al Qaida has a habit of striking in two year intervals. We mention that as it may be more of a psychological issue for investors than a real threat. It is September and many are on edge already, wondering if the late August rally is just setting up selling from the top of the range or if the market will sail on by September as it did in late August.
Nasdaq and the smaller cap indexes could pullback to near support from these levels without much damage while DJ30 and SP500 are perched at the top of their trading ranges and ready for a breakout. They too could test back into their ranges to start the month without any real damage. Indeed, that type of action might sate the feeling that the market needs to sell back in September.
Right now the indexes are behaving very well, showing solid price/volume action (up prices on rising volume, down prices on lower volume) though on below average volume along with continued breakouts from stocks that have formed good patterns and show good technical indications. The advance is broad. Again, the action has been solid, just lacking in volume.
Market Sentiment
VIX: 19.49; -0.44
VXN: 29.52; -0.79
Put/Call Ratio (CBOE): 1.29; +0.68. A very interesting reading on a session where all major indexes posted gains. Typically when the market is rising the ratio falls. Friday the ratio spiked. This is an indication of concern over the near future. From what we hear from option market makers it looks as if some big stock holders were buying protective puts in case the market repeats history and falls in September for seasonal or other reasons (e.g., 9-11) while some option players were loading up with some puts to speculate on any possible downside for the month that is known as the weakest for the market. Fear may have been higher, but the market still rose despite the concern.
NASDAQ
Nasdaq spent a short period over the August high at 1812, but a sharp downside spike late closed it just under that level.
Stats: +10.27 points (+0.57%) to close at 1810.45
Volume: 1.216B (-17.3%). Volume was extremely low on the session before the long weekend. After some good price/volume action this was not great, but it was expected given the long holiday weekend ahead.
Up Volume: 841M (-235M)
Down Volume: 329M (-48M)
A/D and Hi/Lo: Advancers led 1.35 to 1. Breadth was not impressive as much of the Nasdaq gains were in the large cap stocks.
Previous Session: Advancers led 1.54 to 1
New Highs: 281 (+22). The index hit a new, and while new highs were solid, there was no big explosion higher. That is some indication the move is a bit weary, but not a lock.
New Lows: 6 (-8)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A new 17 month closing high, but the index struggled and fell back as it tried to clear the prior August high at 1812. There was no volume, so breaking over that level would not have meant a whole lot anyway. As it was the index did what we thought: rallied to that level and could go no further. That sets it up for a test lower this coming week toward the 18 day MVA (1750), and that roughly marks the July high (1776 to 1754).
S&P 500/NYSE
Moved up toward the top of the range on low volume, a solid move after making the higher low at the 50 day MVA.
Stats: +5.17 points (+0.52%) to close at 1008.01
NYSE Volume: 942.55M (-18.06%). Very low, below average volume as SP500 moves up toward the top of the range.
Up Volume: 678M (-162M)
Down Volume: 243M (-52M)
A/D and Hi/Lo: Advancers led 2.02 to 1. Very nice advancing breadth once again as the small and mid-cap issues led the market higher.
Previous Session: Advancers led 2.32 to 1
New Highs: 257 (+65)
New Lows: 4 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Still in the nice lateral range, moving back toward the top of the pattern (1015) after making a higher low at the 50 day MVA (985.33) last week and showing solid price/volume action, it is perched for a breakout. It has been here before, now we see if it can take advantage of it.
DJ30:
Stats: +41.61 points (+0.44%) to close at 9415.82
Volume: 942.55M (-18.06%)
Similar to the SP500, DJ30 made a higher low last week over the 50 day MVA (9185) and then started back up toward the top of the range at 9500, the intraday high hit 5 sessions back when the blue chips broke higher and then reversed. It is poised for a breakout as well if the buyers come back ready to buy. It can slid back down to the 50 day MVA for a test once again and not do any damage to the pattern.
THIS WEEK
This is the week everyone ahs been talking about all last week: will the market sell in September again or will it continue the run higher. The put/call ratio has been high 3 out of 4 of the last sessions as the market trended higher. There is real concern regarding a September sell off. That is a contrary indicator, and the market is not showing any signs of distribution or other big money dumping of stocks.
That of course could change when the rest of the fund managers return this week. We are keeping our stops at reasonable levels in the event some distributive selling starts. Given the history of the month we would rather lock in some gain or get out as close to flat as possible if higher volume selling begins. Given the low volume last week, it would not take much volume at all for higher volume selling to show up. The concern is average or above average volume selling as that would show the majority of the big money was starting to unload stocks.
Is there a reason for them to sell? The bear market made everyone valuation hawks. Barron's is questioning the education and training stocks and other analysts are pushing valuation downgrades now that many stocks are hitting 52 week highs. Many fear stocks at new highs though history shows that stocks hitting new highs continue to do so. Why? Because they are making money and are doing it better than the other companies out there. Investors want to own them.
Other than concern about valuation sparking selling, there could always be some external event such as a new, big terror attack. Last week there was the story about AQ trying to hijack more airliners, perhaps in the UK. Given the proximity to 9-11 that has some concerned. You cannot, however, invest upon the expectation of random events. There are also a lot of key economic reports, the employment report on Friday receiving the attention but the ISM, ISM services, and factory orders also being key indications.
The market is showing very solid action on the rally from March to July and in the consolidation based on the anticipation of and the subsequent confirmation of improving economic data. That economic data continues to improve and it appears the rate of expansion is accelerating. That bodes well for the market as the year continues. There can easily be a pullback to test the trading ranges without doing any harm and indeed giving stocks another breather. While we have some trepidation based on the time of the year, the market is not telling us to turn away from opportunities as they turn up.
SUBSCRIBER QUESTIONS
Q: How can you tell the difference between a blow-off top and a good volume move, breakout?
A: A blow-off top is a ballistic run where a stock makes its final, ballistic move in a long run and then rolls over and gives most of the final run back and even more in some instances. It is thus a good thing to recognize when it occurs as it can cost you some big gains. Better to lock in then pick up the stock again after it forms up another good pattern and breaks out, that is, if it does.
The basic difference between a "proper" breakout and a blow-off top is that the former will come from a solid, well-developed pattern while the latter occurs after a long run, typically after the breakout and run higher in a late stage base. A late stage base is a fourth or fifth base such as a cup with handle in a series of bases and breakouts. A blow-off top is characterized by extreme high volume and a very rapid increase in price, followed by a relatively rapid sell-off. Volume in a blow-off top is on the strongest or close to strongest volume of the run. A breakout, on the other hand, is when a stock is just beginning a run, showing a definite surge in volume (though not ballistic) as it moves out of the well-defined pattern, and will in most cases fall back but can catch support on the test and continue the trend higher.
A stock can, in a blow-ff top, gain 50% to 100% in a short time (usually occurring over a few days) on extreme volume. What accounts for the huge volume? It becomes a 'got to have' stock. The big money that bought when it made one of its breakouts from its series of bases leading up to this move is using the rush of buyers to exit the stock. Hence the huge volume. The trouble is that by this time it is really too late since the stock has already made its run. A good example of this is QCOM in late 1999. The stock had been trending upward mid-year after bouncing up its moving averages then on huge volume blasted up into a blow-off top as technology stocks had their glory days. It tested briefly then blasted up
again; this time volume was markedly lower and the stock's stretch was doomed. The stock retraced every bit of the move within 6 months. While the bear market of course did not help it get back on its feet, it is just now starting to show life, breaking out of a small double bottom with handle last week.
Thus, the key to confirming the difference between the two is to understand how the stock has been moving prior to the move higher. Was it in a good pattern, or did the stock just blast out of a steady uptrend on screaming volume? In other words, where in the life history is the stock and is it showing attributes of excess.
End part 1 of 2
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