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us stock market, stock watch
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9/06/03 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: MRVL; CRUS;
Trailing stops issued: XOMA
Stop alerts issued: COCO
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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Rally shows some wear, but holds up remarkably well given the employment report.
- Why the conventional wisdom is wrong and is missing the crucial and exciting dynamic emerging in the job market during this economic recovery. Structural job change? You bet and it is something fantastic.
- Market readies for a pullback as talk of valuation again emerges, but stocks are holding up well.
Jobs report disappoints as anticipated, but market does not cave.
The indexes had rallied into the employment report, setting up an potentially precarious situation given the anticipation of job creation. The economy did not produce the net 20K jobs expected, instead losing 93K. The news sent the market lower early despite belated affirmations from some big banking names that the economic recovery was for real and 5% GDP growth was expected in Q3. That mitigated the damage, but the myopic focus on job creation still so early in the recovery set the market up to fail.
Buyers stepped in after the early selling and started a session-long tug of war with sellers. Semiconductors continued to bask in the glow of good earnings results and mid-quarter updates, but they gave up a 2% gain to close up just 0.9%. The indexes had to rally back to hold near support after undercutting it intraday. Nasdaq showed its second doji in three sessions as volume edged higher. That action indicates churning, i.e., higher volume selling that often precedes a dip lower. The undercut of support, the churning, the second doji in short order after a strong run are all indicative of a run that has grown a bit weary.
This action is a continuation of what it started to show on Nasdaq Wednesday. The salient point is that even with a large disappointment in the jobs report the market only hiccupped, simply continuing the slower action as the rally stalls out a bit ahead of a pullback to take a breather. Buyers even stepped back in at the first opportunity after the early selling. While the market may be in need of a breather, it seems clear that there is still healthy buying interest and that buyers will be ready to step back in when they perceive there has been enough correcting. Even with the selling Friday most stocks held up fine and chips posted very nice gains.
THE ECONOMY
Jobs report is a splash of cold water to those hoping for premature job creation.
93K jobs lost with all sectors taking the hit. Manufacturing lost 44K, services 67K, government 26K. A far cry from a net 20K jobs as expected. The employment rate fell to 6.1% from 6.2%. Hourly earnings rose by 0.1%, not enough to indicate current workers have the upper hand regarding wages. Importantly, the work week held steady at 33.6 hours. The workweek needs to hit near 36+ hours to indicate a need for more workers. It is just not happening yet.
This was a big disappointment to those expecting a jobs recovery to start in August. Heck, the 4-week average in weekly jobless claims just fell below 400K (it edged back over that this past week); it was nowhere near indicating the turn to job creation had come. On the other hand there were those adamantly stating that the jobs report 'confirmed' their 'thesis' of the latest buzz phrase in the job market: structural change. The idea is that the economy has changed such that it won't create the same number of jobs because of the utilization of technology and migration offshore.
Both are wrong in our view. According to past history it is still too early in the recovery for job creation. That is why we were concerned about these rather foolish hopes for net job creation at this point. We have said all along that the cycle for jobs would not be showing creation until the end of the year. At that point they should show up, and we anticipate they will. The issue is what and where the jobs will be.
Structural job change is not what many are saying it is. It is fantastic, not sinister.
What about structural change, i.e., the permanent loss of jobs that is the new phrase being used in DC and elsewhere to belittle the recovery to this point. It is not enough that the economic indicators show the economy is ramping up rapidly; even in the jobless recovery of 1992, that increase in economic activity ultimately led to job creation. Jobs are not being created today, however, so there is still time to make political hay by denying the signs of economic improvement that leads to jobs and also creating another economic problem (structural job change) much as the Fed created new inflation indicators in 1998 and 1999 in its inflation snipe hunt. The supposed worry is that jobs are leaving and not coming back due to huge productivity leaps and manufacturing heading offshore.
While it is very true that productivity eliminates the need for some positions permanently, the idea that the US economy will never create large numbers of quality jobs again is myopic. Think of it along the lines of the stock market. When there is a long bull run that finally collapses as in 2000, those stocks that led the move are not the ones that lead the next run. They are replaced by the stocks representing new ideas, new technologies, new directions for the economy. Right now wireless is hot and thus the chip makers for those areas, the wireless device makers, the network hardware makers for these uses are many of the new leaders.
With the jobs market, there will be new jobs created just as new leaders in the stock market emerge. The jobs just won't necessarily be the same ones that were there before the economy went through its recession. Recession typically heralds change. In 1982 that marked the start of the recovery out of the horrid 1970's, the investment generated by the tax recovery act of 1981 and the subsequent boom it spawned developed companies such as Apple Computer, Dell, Intel, Cisco, Microsoft - - the leaders of the new tech era. After the massive tech equipment boom of 1999 to 2000, the economy is loaded with computers, fiber cable, expensive software systems. That technology base is fostering new technologies (e.g., wireless) and creating new service areas in the economy as we emerge from a nasty downturn into a new era that has to deal with the cost of terrorism prevention at home and abroad and the US' new role as the major terrorist police force. This is the real aspect of any structural change.
Divergence in unemployment rate and non-farm payrolls indicates major change coming.
The jobs report is showing the facts and data to support this, but no one is reading the signs that are there for everyone to see. It is easy to focus on the negative and think inside the box and thus miss the change that is taking place. There is structural change, but it is an incredibly positive dynamic that occurs in every recovery from a serious, serious economic upheaval, and it tells us why the unemployment rate fell to 6.1% as this household survey shows job creation and not job loss. While the non-farm payroll data compiled from businesses shows losses of 93K jobs in August and over 2 million jobs overall, the household survey showed an increase of 147K jobs in August and 1.19 million so far this year. How can that be?
In recoveries it is very typical for individuals to strike out on their own and form new businesses themselves or with others from the same industry. This is even more pronounced after a major economic upheaval such as that we have experienced with the huge stock market crash, national election issues, sharp plunge in economic activity, 9-11, and corporate scandals. Why? Because there are no jobs to get so they start on their own. This is how new companies, technologies, and industries are born. Remember the Apple Computer story about how Jobs and Wozniak started Apple in the garage? The Microsoft boys were Ivy League drop outs, living in motels and struggling get a handle on this new computer industry. These new businesses were spawned in the early recovery from a very nasty recession and helped create the wave that created millions of jobs and billions of dollars in wealth. Heck, yours truly graduated from college in 1982 and there were damn few jobs. I struck out on my own and am convinced that is the best thing that could have happened individually and for many others as I have been able to help many learn how to become financially independent.
The employer non-farm survey does not capture this business creation. It is a good indicator of problems on the way down in an economic cycle because it shows when companies start laying off, but after a severe economic downturn it is not reliable because economic changes lead to the creation of new businesses long before the traditional companies start hiring again. Thus the non-farm payroll data, already a lagging indicator, does not capture the major changes in the economy that arise in the return from major economic upheavals.
In sum, the jobs report is not the economic nightmare that it is made out to be by many in DC with political agendas to push. To us we see very exciting developments occurring. Gloom is always high at these times just as it was in the late 1970's and early 1980's with energy concerns, hostage situations, questions about US economic and military might, the costs of environmental regulation; there just seems no way out. Already, however, there are very solid economic growth signs and underpinnings, and new industries such as wireless and security are rising. There will be new jobs spawned by these new industries and new technologies that are just starting to emerge. What people have to get over is that there won't be the same jobs to return to that they left just as in the early 1980's and again in the early 1990's. It won't be a complete changeover, but there will be change.
In the interim the economy is still in the process of getting to the level of activity where jobs are created. New businesses have to germinate and start growing. Established businesses have to be confident that the recovery if for real and then actually see the need. At this juncture many of the jobs showing up are lower end service, typical in the start of a recovery. It takes longer for companies to decide to make the high dollar positions available because of the many associated costs. Help wanted ads are heading higher, temp workers are being hired at a fast pace; there are going to be jobs again. Things will be different in the sense that the job types will change, but the theory that there will be permanent mass losses of jobs is an overreaction to the change that is occurring. Instead of fear what is happening we should be spreading the word and looking to those areas that are going to benefit. The beauty is the stock market focuses us in on those leaders, forecasting the stronger companies just as it forecast the economic resurgence.
THE MARKET
The deck was stacked against stocks Friday as the market was already showing signs of needing a rest even though the chip stocks had found new life. The employment data got things off poorly and the buyers could not find enough strength to again carry the day. Nasdaq recovered from early selling to rally positive, but it failed and had to fight back in the last hour to hold near the resistance it just punched through. DJ30 has to struggle to get back to 9500 in a breakout test. It was the second doji in three sessions on Nasdaq, showing some churning on a slight rise in volume.
After a 200+ point move Nasdaq is showing signs of needing a rest. SOX was starting one but then had too much good news to stay laying down. After the run, it looks as if stocks are ready to take a breather. The key, as always, will be whether the indexes and leading stocks hold their breakouts and/or support.
While it simply looks like a normal market pullback, the fact that it is September still is a concern to many. Another typical issue after a solid run is the claim that valuations are too high. There were valuation downgrades last week and there was chatter Friday that again valuations were rich.
We always have a problem with that. In a market something is worth what another is willing to pay for it. That does not turn on a static valuation measure of say 8:1 being good and 80:1 being bad. If that was the case, when Dell had about an 80:1 P/E in 1996 it would not have gone on to run and split 5 times up to early 1999. Same with CSCO, MSFT, etc. Different economic conditions and beliefs about the future kept buyers coming. When the crash came and the economy was seen as contracting and not growing, investors were disinclined to pay the same price for the stocks as earnings growth potential was gone. The late nineties was an extreme case, but the point is not the P/E per se, but what buyers and sellers are willing to pay for a stock. More times than not in history that has little to do with the P/E ratio except at the very depths of a bear market.
Thus we don't view it as ratios getting too 'rich' and thus leading to a pullback where the market catches its breath. If that were the case, a slight pullback would not be enough to remove the problem. To get really cheap valuations the market would have to tank again to the lows, maybe beyond (earnings have risen, so it would not have to fall as far). At this juncture the market shows no sign of that, just the need for a breather after a good run. Again, September is a psychological hurdle for investors even if the market is working well, but the market is not showing the type of strain that would start a significant selloff.
Market Sentiment
VIX: 19.37; -0.52
VXN: 30.7; -0.21
Put/Call Ratio (CBOE): 0.72; +0.04
NASDAQ
Another doji as Nasdaq fought ot hold that resistance it just cracked Thursday.
Stats: -10.73 points (-0.57%) to close at 1858.24
Volume: 1.958B (+2.61%). Volume edged higher on the doji, a sign of churning (high volume selling as the index runs in place). After a run higher this churning is indicative of a pullback ahead.
Up Volume: 913M (-488M)
Down Volume: 1.027B (+533M). Very evenly matched, indicating a change in momentum along with the doji.
A/D and Hi/Lo: Decliners led 1.26 to 1. Breadth on the move higher was not great and the downside breadth was not heavy on the Friday selling.
Previous Session: Advancers led 1.34 to 1
New Highs: 310 (-45)
New Lows: 9 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq has run 230 points from the August low and is now 25% above the 200 day MVA (1502). It has shown two tight dojis last week. No real distribution Friday and the price/volume action has been solid on the move higher. Thus this looks like a more ordinary, run of the mill pullback to take a breather after a solid move higher. It could always morph into something more sinister, but for now it looks like a test of 1800 to 1788 (the 18 day MVA) is a good target if things stay quiet on the pullback.
S&P 500/NYSE
Tapped toward the top of the trading range on the low but held the move as it edged back on lower volume.
Stats: -6.58 points (-0.64%) to close at 1021.39
NYSE Volume: 1.436B (-0.7%). Good to see volume fall back on the pullback toward the top of the range.
Up Volume: 593M (-184M)
Down Volume: 835M (+180M)
A/D and Hi/Lo: Decliners led 1.22 to 1. Very modest downside breadth, similar to the poor upside breadth at the last part of the move.
Previous Session: Advancers led 1.29 to 1
New Highs: 255 (-63)
New Lows: 5 (-7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps again found resistance at 1030 and fell back to test toward the top of the prior range at 1015 (1018 on the intraday low). It managed to hold and rebound for now, but SP500 has little room to maneuver before falling back into the 962 to 1015 trading range. The breakout last week was solid, following a very nice 2.5 month lateral base. We will see how strong that move was. A tumble back into the base would not be a total tragedy, but it would require more work yet again. A test of 1015 (10 day MVA at 1012) and a rebound would be best, but if Nasdaq sells harder it makes it more difficult for SP500 to hold the breakout.
DJ30:
Stats: -84.56 points (-0.88%) to close at 9503.34
Volume: 1.436B (-0.7%)
It was a struggle all session, and the blue chips were unable to even attempt a rally after an early tank lower. The index held the breakout over 9500 on the close, tapping the 10 day MVA on the intraday low (9461) and recouping some of the losses. As with SP500, the breakout from the 2.5 month range was solid, but there is not a lot of room to pullback to test the move. While Nasdaq and the smaller caps rallied, DJ30 and SP500 based. Nasdaq, et al have further to pullback while the large caps and blue chips should be well rested and ready to run. They have not been the leaders, however, and they will be hard pressed to take the lead even with the nice rest in the base.
THIS WEEK
Looks like a week of testing in the market after a strong run in Nasdaq and the smaller cap indexes. Momentum has slowed and Nasdaq is showing a shift in momentum. Overall the action remains positive with stronger volume moves higher, good leadership from key groups (chips), and other ready to step in and breakout if there is rotation (e.g., biotechs, scientific & technical instruments).
As always the key is how the leaders react to selling (lower volume, holding support is best) along with the indexes. There is still a big September/October stigma out there with the 2-year anniversary of 9-11 thrown in there. The history of these guys is a two-year hiatus after the big terror attacks. That has many on edge, but it is really impossible to invest with that concern.
Thus we will continue to watch the action of key sectors, stocks, and the indexes. We still see many stocks that are ready to make a break higher if they get the buying interest here. That will happen if there is rotation in the market during the pullback as opposed to the big money just dumping shares and getting out of the market. As indicated earlier, the market is not indicating any severe or significant selloff in the works other than the anecdotal evidence of the time of year and 9-11 approaching. Accordingly we will maintain the current game plan of looking for breakouts and rebounds off of support and letting current plays come back to test near support. We could even sell some calls against stock positions during this turn back down, in effect renting out our stock for the premium we are able to sell the calls for. Typically we prefer to sell at or slightly in the money calls as they hold the better premium and will lose value quickly as price falls. Then we can buy them back quicker with a nice gain.
Economic Calendar
9-8-03
Consumer credit, July (3:00): $5.0B expected -$0.4B June.
9-9-03
Wholesale inventories, July (10:00): 0.0% expected, 0.0% June.
911-03
Initial jobless claims (8:30): 395K expected, 413K prior.
Trade balance, July (8:30): -$40.5B expected, -$39.5B June.
9-12-03
PPI, August (8:30): 0.3% expected, 0.1% July.
Core PPI: 0.1% expected, 0.2% July.
Retail sales, August (8:30): 1.2% expected, 1.4% July.
Retail ex-Autos (8:30): 0.7% expected, 0.8% July.
Michigan sentiment, September (9:45): 92.0 expected, 89.3 August.
End part 1 of 3
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