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money investment, investment help
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9/13/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: None issued. Did not see what we wanted.
Trailing stops issued: CMVT
Stop alerts issued: None issued
MARKET SUMMARY
Stocks shrug off weaker retail sales, continue rebound.
For the second consecutive session stocks started lower, tested support, shook off some disappointing news (jobless claims, lower retail sales, falling sentiment), and then rallied to the close. For the second consecutive session some leaders made good volume moves but they were relatively few, and overall volume dropped off. Not bad action if a market is just taking a pause. Not bad action if it is selling off either, though the lower volume on the bounce makes it look very much like a relief move following a couple of distribution (high volume selling) sessions.
So we have a market that is showing signs of wear and tear after a strong run, i.e., bouncing up and down day to day and then selling down on stronger volume. At the same time it continues to show the resilience that has marked the entire run. It still holds at near support on the pullbacks, it still resumes positive intraday action (rallying from early tests lower to close at the highs) even after bouts of distribution, some leaders continue to run while others form new bases as opposed to breaking down, and money continues to rotate within the market as opposed to leaving the market.
That leaves the same question popping up on each financial show, in each financial rag, or radio talk show: is the rally over, how much further do stocks have, or some other variation of concern over valuations, the time of the year, rising deficits, higher interest rates, the Iraq war. The market certainly shows attributes of a further correction, but just as in late June and early August, it refuses to crack. Instead it gets volatile, corrects internally (days of selling even as it trends higher), pulls back to near support, and then moves right back up.
We all have our ideas about where the market is going next; we feel it is overdue for a more sustained correction. Thus far, however, it has done its correcting by bouncing back and forth day to day even as it moves higher with short tests to the near support (e.g., the 18 day MVA). With leaders (e.g., JCOM, SINA, UNTD, SSYS, etc.) continuing their uptrends even after being tested, what we all think takes a back seat to what the market actually does. It is showing signs of some stress after a strong run, but quality patterns continue to set up and break higher.
Sure we use caution when the market shows some distribution as it has been doing, but as long as the distribution sessions do not pile up and solid breaks higher from solid stocks continue, our caution manifests itself by sticking with the strong stocks as they break higher on strong trade, showing that the big money is moving in, and closing those positions that break support or their near trend and cannot recover in short order. Any stock, even the most powerful, will give us a scare as it tests a move. As long as it can recover that support in short order, we are reluctant to cut it off in a market that is trending higher.
THE ECONOMY
August retail sales rise 0.6% versus 1.5% expected.
The strong pace of retail sales slowed in August, and when expectations are not met or surpassed, analysts already concerned about the job market become even more skittish. While not meeting expectations, the numbers were still very solid and indicate the continued trend of strong consumer consumption that is now being assisted by rising business investment.
The numbers behind the headline tells most of the tale. Year over year sales rose an excellent 5.4%. The drag was mainly in autos where unit sales were very strong but big dealer price markdowns kept sales, measured in dollars, down for the sector (6% jump in unit sales but just a 0.5% in dollar sales). Take out autos and sales rose 0.7%. Year over year that was a 6% gain, the best in nearly 3 years. Home electronics (+1.4%; 10% year/year), furniture (+0.7%; 7.4% year/year), restaurants (+1.4%), and general merchandise (+1.1%) paced the gains, showing that consumers are continuing to spend well in discretionary areas. The year/year gains and the continued hot pace in discretionary spending categories is a strong underpinning of the strength in the retail area.
Michigan September sentiment falls to 88.2 versus 89.3 in August, 90.4 expected as Iraq war appears to be a growing issue.
The 200 surveyed were a bit less enthusiastic with current conditions coming in at 98.9 from 99.7 with expectations falling to 81.3 from 82.5. There are a plethora of issues confronting consumers from jobs to Iraq to the 9-11 anniversary. As retail sales have shown, however, the consumers tend to spend regardless of their views, at least as long as sentiment does not dump much lower.
There is a lot of talk about the economy as the key election year issue, but it looks as if the lingering problems in Iraq are going to be the key issue. In past elections, GDP growth has been the key versus jobs. Each quarter GDP growth exceeds 2.9% adds a percentage point to the incumbent's share of the vote. GDP has already exceeded 2.9% in 3 quarters of the past two years and is going to do so in Q3 and Q4. If the recovery continues that helps the current administration. Further, elections are often determined by rising per capita income. Real disposable income rose 5.1% from January 2002 to Q2 2003, and that was even before the tax cuts started hitting bank accounts.
The bigger issue in historical terms, however, is the Iraq war. That can trump economic growth. The economy was growing in 1952, but the Korean War proved too much for good economics to overcome. The economy was still riding the coattails of the Kennedy tax cuts in 1968, but Johnson was forced from seeking re-election and Humphrey was defeated by Nixon as another unpopular war overshadowed the economy. One of the main concerns among Americans polled is the war dragging on. That is Bush's Achilles heel, not the economy which is going to take care of itself if allowed to do so with these tax cuts.
Americans are very short term oriented, particularly when American lives are involved. We are so lethal and successful in war that when we have the next phase of rebuilding and the inevitable pockets of resistance, this time being fueled by Al Qaida, we get impatient. Some want us to pull out and spend the money elsewhere, a traditional campaign argument. If we don't finish the job yet again, however, we will have the same problems magnified 10 times as Iraq becomes another Afghanistan and a safe haven for terrorists. In the entire action we have lost roughly 300 soldiers and with the new appropriations request will have spent roughly $200B. This has taken 5 months. In the history of the world this is unprecedented. If we stay the course we can put a serious dent in future terror related costs, a boon to our economy as well as the world economy.
Traditional jobs versus new jobs.
Structural job loss. A new rallying cry for those needing to find another reason to attack the economy now that it is very clear it is surging forward. A more accurate phrase would be structural job change. Loss implies jobs are gone and none are going to appear in their place. It implies a net loss. Whether you get net job loss or not depends upon how you look at jobs and how you gather the information.
The recent jobs report underscored a growing divergence in how jobs are accounted for as the method used in 'normal' economic dips and recoveries counts employees. That is okay if there is no major economic upheaval, but the boom then bust of the late 1990's and early 2000 left a lot of wreckage. With the explosion in new businesses, any economic slowdown was going to lead to business and job loss just through consolidating as a lot of excess startups that were riding the crest were weeded out. On top of that there was a complete cessation of corporate spending for three years. Tech companies felt like the dinosaurs that were able to survive the meteorite impact only to have to then search for food. Change, evolution, metamorphosis or whatever you want to call it had to occur, but that did not mean no new life was going to fill the void.
There are two competing measures of jobs: the employer survey and the household survey. The employer survey asks how many employees companies have. The household survey goes to homes and asks if there is a job. The former takes in just full time employees. It does not count the burgeoning temp worker field or the contract worker field. With temp hiring already running at 130% faster now than it was in the recovery of 1992 and the growth in popularity in temp hires even in professions such as law, engineering, it is easy to see right off the bat that the jobs method of counting jobs is not reflecting all of the jobs currently in the market. That does not include the plethora of start ups again emerging simply because the behemoth companies are still in the job cutting mode as they try to offset flagging sales and revenues by cutting costs. Those big companies do not reflect the growth in the economy because they are NOT growth companies. You have to look elsewhere for that as we discussed last week. You have to look at the startups just as MSFT, DELL and CSCO were back in the late 1970's and early 1980's.
Back in March 2001 when the recession 'officially' started, the household survey showed 137.7 million people said yes they had a job. In August 2003, 137.6 million people answered yes. Virtually unchanged, yet the employer survey shows 2.7 million less jobs. If the same number of people say they have a job but the companies show fewer employees, that means people are simply working elsewhere. Now that does not mean they are working at the same caliber of job, but it also means that there are other jobs and that there are more start ups. That is typical of this kind of economic change: there is a shift in where the jobs are being and will be created not only as far as jobs for employees but sole proprietors as well. Most of the country is small businesses, and most of those are sole proprietors and Sub-S corporations, i.e., basically one or two person shops. If they need help they hire temps or contract workers. Again, those don't show up on big company payrolls. Again, those with jobs now equals those with jobs back in 2001.
This is not the greatest period of job loss since the Great Depression as we hear daily on the campaign trail. 6.1% unemployment was considered close to full employment up to just 10 years ago, and it matches the rate in 1978, 1987 and 1994, periods of weakness yes, but no one ever compared them to the Great Depression. It takes a looming election to make that kind of wild leap in order to create pseudo problems. One last point: the median duration of unemployment has fallen from 12.3 weeks in June to 9.6 weeks in August. At the same time the government shows continuing jobless claims rising. Again and again we see major flaws in the methodology of the government job counting.
Summary: There are definitely changes in the job market. Big slow moving companies with slowing earnings growth due to their size are losing jobs and are not going to bring them all back because they cannot afford to as they are no longer growth companies. They are looking to temps and contract help, and those are not counted in the job market. The boom and bust in the market and economy has collapsed many businesses and those jobs are lost. Those same boom and bust forces, however, are also leading to the creation of new businesses all across the country. Those are the businesses the tax cuts are helping. Those are the businesses that will carry the economy forward with new inventions and new jobs. There is always short term pain in these types of major changes, but because we allow a free market to work our economy comes out the leader time and time again.
THE MARKET
The market finished the week lower but it is still set up to move higher as the major indexes held the 18 day MVA after the early week test and rebounded. It was not a powerful rebound as volume fell off on the Thursday and Friday bounce as 9-11 was remembered. It was a short pullback, not exactly what Nasdaq needed to clean out the plumbing for a further move higher. This recovering market, however, continues to receive more and more money that is being slowly dragged in and put to work. It corrects day to day after it makes a good move, makes a tap at support, and then starts anew.
We have yet to see the confirmation from again higher volume as it recovers from the 18 day MVA test. Many stocks and leaders are starting back up, but we want to see strong overall buying come back in. Volume cannot rise every session; soon there would not be enough money in the world to fuel it if it did. It does need to show good overall upside volume versus downside volume, i.e., generally up on rising sessions and lower on down sessions. There have been some down sessions on rising volume the past two weeks. That is why some strong upside volume sessions off the 18 day MVA would be a good confirmation of the resumption of the move higher.
Market Sentiment
Volatility ticked higher last week, but it was nothing significant from a macro perspective. The volatility issue we noted the past two weeks was occurring before the slight uptick. It is that day to day back and forth action even as the trend holds that indicates there is some selling at work, undermining the advance. The indexes sold to the 18 day MVA and are now trying to recover and offset that volatility and distribution that has marked what we call 'internal' corrections by the market.
VIX: 20.25; -0.25
VXN: 32.68; -0.29
Put/Call Ratio (CBOE): 0.9; +0.01. Continued significant amounts of put action as the market sold off early but then managed to rally to close at its highs.
NASDAQ
Again tapped at the 18 day MVA and rallied back for a gain. Trade was lower, but it was still above average.
Stats: +8.94 points (+0.48%) to close at 1855.03
Volume: 1.716B (-2.35%). Volume backed off on the gain, not wiping away the distribution from Monday, but keeping solid trade on upside sessions as well.
Up Volume: 808M (-571M)
Down Volume: 884M (+532M). Dead heat.
A/D and Hi/Lo: Advancers led 1.27 to 1. Very modest upside breadth on the gain.
Previous Session: Advancers led 1.91 to 1
New Highs: 169 (+27)
New Lows: 4 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq came back from some a Tuesday distribution session and some punishing price losses Wednesday that pushed it down near the 18 day MVA (1816). It showed solid intraday action both Thursday and Friday, starting lower, testing support, and then rallying back to close at or near the session high. Volume was lower though still above average; Thursday that was due to 9-11, and Friday may have been more of the same though that excuse wears a bit thin. Volume has been stronger and mostly positive since Labor Day. There has been some distribution, but nothing to the point that is really telegraphing a pullback. Instead Nasdaq has consolidated its moves on the fly. After this last week and the 18 day MVA test we will see if the buyers come out swinging and take it to the next level with some volume. Many stocks are ready to move if the buyside volume comes back in. If we don't see a strong surge in upside volume as Nasdaq moves back up toward the recent highs from 1870 to 1888 there is a lower volume second top that could spell a deeper pullback. We will cross that bridge when we come to it.
S&P 500/NYSE
Not bad at all, holding the 18 day MVA and rallying back though volume was not there. It is set to move if the buyers are ready.
Stats: +2.21 points (+0.22%) to close at 1018.63
NYSE Volume: 1.229B (-5.18%). After distributing Tuesday and Wednesday, the large caps rebounded to end the week but on below average volume. The two quick distribution sessions are something to be wary of. Need to see upside volume return.
Up Volume: 716M (-195M)
Down Volume: 498M (+130M)
A/D and Hi/Lo: Advancers led 1.48 to 1
Previous Session: Advancers led 1.95 to 1
New Highs: 107 (+23)
New Lows: 13 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps were struggling Tuesday and Wednesday, selling on rising volume. Though they gave back the breakout over 1015 during the week, they managed a token rebound to reclaim that level Friday. After a 2.5 month consolidation that looks very pretty the large caps are back at an inflection point. They are holding the top of the pattern, and with a nice base behind them they are in position to make a move higher after testing the 18 day MVA to end the week. If they can overcome the Tuesday and Wednesday distribution and rally higher on strong volume they are really in good shape as they held on and overcame the sellers' best shot. Stocks such as GE are set up nicely to advance. If they can make the break SP500 is set to move with them.
DJ30:
Stats: +11.79 points (+0.12%) to close at 9471.55
The blue chips are still below 9500 even with two modest upside sessions to close the week. 9500 was the August high that was topped to start this month but was relinquished as DJ30 sold and distributed some on Wednesday. That session followed some mild distribution Tuesday. DJ30 is in the worst position as it has fallen below that prior resistance from August. Volume for the Dow 30 was up Friday but still below average. They need some help from the other indexes. As noted, GE is on good shape and MSFT recovered well Friday, so it may get that support internally as well.
THIS WEEK
Information overload this week with some regional manufacturing reports, FOMC meeting, industrial production, and leading economic indicators. There will also be some earnings reports starting in from Best Buy, Federal Express, Bear Stearns, Nike and Palm. Investors will have their choice of data to look at.
The big issue for us is whether the 18 day MVA test turns into strong upside buying. Many stocks are set to make moves just as SP500, Nasdaq, and the small and mid-cap indexes are set after that mid-week test. Now all they need is some volume and leadership to resume after the pullback.
The market has still not shaken off the effects of that early week distribution. The higher volume selling has not hit the level where it has eroded the foundation and set up a harder fall. We will watch for volume moves from those stocks set to breakout or recover after a nice test. Coupled with a nice upside volume surge in the indexes that is the best indication of the continued rally. AS the trend remains to the upside, that will remain our focus.
Support and Resistance
Nasdaq: Closed at 1855.03
Resistance: 1860 to 1865 tried to hold a bit on the way down, but was not a major level of resistance. 1930 - 1935.
Support: The 18 day MVA (1816). The August high 1812 and 1814 held Thursday. 1776 the July high.
S&P 500: Closed at 1018.63
Resistance: 1030 to 1032. Then 1050.
Support: The top of the range at 1015 is weak support. June closing high at 1011 and the 18 day MVA (1011). The exponential 50 day MVA (996) and 975 (December 1997 peak). 965 (August 2002 peak).
Dow: Closed at 9471.55
Resistance: 9500 (June 2002 lows) is the top of the recent range. 9735.
Support: The 18 day MVA (9436). 9361 the July intraday high down to 9353. The exponential 50 day MVA (9283). 9250 to 9236, the early June intraday high.
End part 1 of 2
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