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10/20/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: DGIN
Buy alerts issued: SIRI; NEXM; OLGC
Trailing stops issued: CTCH
Stop alerts issued: ANAD; UOPX
MARKET SUMMARY
Buyers enter pensively on a test of near support.
Once again buyers came into the market on a pullback, but it had to ignore some good earnings news from C, MMM, LXK and others in order to sell down to that level. Again the market ignored some important earnings that had key positive aspects other than the headline earnings. Once the market hit the 18 day MVA, however, it found a bid and rallied the remainder of the session to close positive. Bullish intraday and good technical price action given the test of support, a higher low, and then afternoon rally, but the flat breadth and lower volume still indicate that most investors are not participating to the upside, at least up to the Monday close. This is a sign of a struggling market in need of a catalyst to send it higher. Ask for one and you just may get one; TXN beat the street and guided higher after hours and stocks shot higher. Brace yourselves, gird your loins, or whatever you do as the market is again ready to gap higher.
THE ECONOMY
Leading Economic Indicators take a pause on falling money supply.
-0.2% for September is slightly worse than -0.1% expected. The index looks out 3 to 6 months, projecting economic activity in the future. It has a so-so track record, but when it makes a steady climb as it has the past six months, that is another good sign of momentum. And that is the key to interpreting this number. Some want to look at each data point and say 'there it is, that tells the story.' No, it takes two points to make a line, three to make a plane, and at least that many to start a trend. Thus the slowdown should be read as a pause in an otherwise solid expansionary trend.
Still, the reason for the decline warrants consideration. The drop was solely the result of falling money supply. Money supply is important because it is the lifeblood of the economy. Take it away and the economy grinds to a halt. That is exactly what happened in 2000 when the Fed called all the money it had loaned for Y2K back and then some. Markets crashed, the economy followed, and we suffered through the worst bear market since the Great Depression. It is money supply that has helped usher in the recovery. It takes lots of money available at a low price to get otherwise hibernating businesses to awaken and start building and investing for the future once again. Months and months of easy money and tax cuts have finally started to pay off.
Now the Fed, the controller of money, has sucked some of the money out of the economy. Nothing alarming at this point, but surprising to see the Fed do this. It is not only interest rates that control monetary policy, but the amount of money itself that is available in its various forms. Money supply edged back and that showed up in the indicators and it has, just a bit, spooked the market. It has added to some volatility, particularly among the high beta stocks (stocks that run up and down at a faster pace than the overall market) as those are very sensitive to economic activity. We don't see the Fed maintaining this stance as it has a 'free money' policy right now, at least in spoken word. Nonetheless, this Fed is known to mislead, intentionally, markets. The most recent was the bond market fiasco, and before that the 'we are not trying to impact the stock market' lie it solicited all during Greenspan's attack on the prosperity. Thus this is worth watching and we will keep a close eye on it the coming weeks.
Credit card defaults falling, an indication of better than expected economic activity.
Citigroup announced earnings Monday and they were solid. Improvements were from a variety of areas, but the one of most interest economically was the credit card defaults. C noted that they had fallen during the quarter. You have all heard how many of the bears continue to suggest (fervently argue?) that the consumer is overextended in debt and that will bring about a slowing in purchasing that will slow the economy and start a chain reaction to the downside, culminating in basically another Great Depression. Obviously credit card debt along with mortgage debt is a large part of the consumer debt the bears cite.
C, however, noted that defaults were lower. While many will try to explain this away as an aberration, history clearly demonstrates that credit debt does not improve until AFTER a recovery is underway and is rather firmly entrenched. It makes sense; if things are declining or just stable there won't be improvement because there is nothing to change the status quo. It takes more money coming in to do that, and that typically means employment though there is also help this time from tax cuts. Given also that consumers have picked up the consumption pace ever since the end of the Iraq war, it is even clearer that the drop in credit card defaults is a very important aspect that is being overlooked by the bears.
Treasury Secretary Snow calls off the dollar dogs.
In what looks like a truce with the dollar, Snow stated Monday that he would not mind higher interest rates if it meant a stable, fairly valued dollar. Of course that had some screaming that he was preparing the way for higher interest rates, but it was nothing of the sort. It was just another frank and realistic look at the economy: when the economy improves interest rates rise. As long as currencies are at good, market based levels, that is okay because the market will find equilibrium that allows trade to balance out.
Of course the White house had to issue the usual press release explaining that Snow was not saying to the Fed it should raise interest rates, just a free market in an improving economy would lead to higher interest rates. Snow was just saying that he could live with an improving economy.
THE MARKET
There they go again. Market poised to gap higher after 18 day MVA test and strong TXN Q4 guidance.
Will the result be different this time, i.e., a gap higher that holds the gains as opposed to rolling right back over as it has the past two times it found occasion to celebrate with a strong open? The market is still too extended, but it did make the cursory nod to a pullback, coming back to tap the 18 day MVA on the intraday low before it started the comeback Monday. Again, it was new money working into the market at the first opportunity, this time after a 3 day pullback of sorts after gapping higher and reversing last Wednesday. Breadth was flat, volume was lower, and overall the market failed to respond meaningfully to some very solid earnings. The gains were almost stock by stock until the late rally sent the indexes higher. Again a struggle back up. Tuesday we see what guts the market has.
Market Sentiment
VIX: 17.04; -0.58
VXN: 24.78; -0.55
Put/Call Ratio (CBOE): 0.62; -0.02
NASDAQ
A tap at the 18 day MVA on the low sparked some buyside interest and turned the market up to a positive close. Volume was lower, breadth was poor - - not a strong move, but it could act as a springboard to a strong session after TXN shook up the aftermarket.
Stats: +12.78 points (+0.67%) to close at 1925.14
Volume: 1.552B (-11.83%). Lower, below average volume on another move higher, clearly no overall accumulation up off of the 18 day MVA test.
Up Volume: 912M (+601M)
Down Volume: 613M (-817M)
A/D and Hi/Lo: Advancers led 1.04 to 1. Flat. No broad accumulation on the 18 day MVA test.
Previous Session: Decliners led 2.26 to 1
New Highs: 192 (-27)
New Lows: 10 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq finally made the test back to the 18 day MVA (1899) and the September high (1914) and bounced. This was the nearest support level of significance, and Nasdaq made something of it, though not much. It did show there is still buyside interest on dips. In and of itself the move was a low volume bounce. Tuesday we will see if there is more substance to the move when the index gaps higher, led by the chips. Technically it held at near support, a good sign, but it is also near the top of the channel at 1978ish. If it breaks through it could really start a spike higher in a steeper uptrend. In the short term that would be impressive and have everyone talking. Longer term that could lead to a very steep sell off, but again, you have to base your moves on what the market shows you, not what you internally think is the proper or improper way for the market to act.
S&P 500/NYSE
SP500 helped spark the move back up after tapping the 18 day MVA on the low. No volume, but as with Nasdaq, could act as a springboard.
Stats: +5.36 points (+0.52%) to close at 1044.68
NYSE Volume: 1.161B (-9.6%). Lower below average volume on the rebound, again showing there was interest but buyers did not outnumber the recent sellers in the market.
Up Volume: 666M (+395M)
Down Volume: 486M (-504M)
A/D and Hi/Lo: Advancers led 1.26 to 1. Basically flat breadth indicating the move was not a widespread move into the market.
Previous Session: Decliners led 2.18 to 1
New Highs: 166 (-20)
New Lows: 12 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps tapped the 18 day MVA (1035) on the low and that helped set off the rally as funds used the test of support to move some of the new money into stocks and chase the performance for the year. This is the action that has helped prop the market up. The acid test is whether it was strong enough along with the good earnings news to kick off another round of buying. The action is pretty good, holding over the September high and the summertime trading range and starting a rebound. It will need to increase in volume to show there is again serious accumulation starting back up.
DJ30:
Stats: +56.15 points (+0.58%) to close at 9777.94
The blue chips are perched nicely over the 10 day MVA, a very modest pullback after the solid October move. Holding over the September high (9686) on the lows and rebounding nicely Tuesday. It is in the best position to rally if the rest of the market is so inclined as it has little overhead from this point other than the barrier at 10,000.
TUESDAY
The pattern for many companies reporting earnings is a selloff on the news after a good run to the number, and then the start of a recovery a few sessions latter (e.g., BRCM, EBAY). The news has been good, better than expected, but stocks had run into the news and were somewhat set up to pullback when it became fact.
TXN had things hopping after hours. It was up over $2, not bad for a big, large cap, stodgy company. It set the other chips and techs on a rally after hours, not necessarily by beating the street by 3 cents, but the upside Q4 guidance was really positive (it has already raised guidance for the year ahead of this earnings report). It is fascinating and it is happening just as we said it would, but no one is really calling it for what it is. As recent as a few weeks back many CEO's were still saying they had no visibility as to the future. There are still many saying that, but there are scores also upping guidance for the next quarter and beyond. It has, almost overnight, become a story not of visibility but of sustainability, as in how long it will last. With the economic momentum still rising, the outlook is still promising. To be trite, the future is now for the economy just as it was for the market back at the start of the year when it had rallied off the lows but was making its first test. Many did not believe what was happening then despite with the market was telling them, and looking at the news headlines and the comments from presidential candidates, many do not believe or recognize that it is happening now for the economy. CEO's have held off as long as possible saying anything positive, and they still don't except for the increased guidance. They have to do that because of Regulation FD, but they are doing no more.
Tuesday will be the latest test for the market. After holding and bouncing off the 18 day MVA after a 3 day pullback it is set to gap higher after some solid TXN earnings and increased guidance. The chips led the session Monday and are set to lead Tuesday. The big question is whether the gains will hold on this time or will sellers again move in to unload stocks when they gap higher. That has been the process of late on good news: shorts cover some, buyers rush in, and then there is selling on higher volume that takes away the gains. Repeat that action over and over and you have the foundation eroded as the big money is using the gaps higher to unload shares. When they are gone there is nothing to hold the market up and it makes a more serious drop.
We are going to still look for upside plays given the continuing strong earnings, economic data, and uptrend. Of course we will focus on how the indexes react after gapping higher, but our primary concern with respect to stocks will be those that have set up to move and make breaks on strong trade. The market has been balking at making and holding a breakout for the next leg higher at the same time many stocks are making strong and sustained moves out of good patterns. We will be ready for those stocks as we keep an eye on the market overall and how it responds after gapping higher. There are some plays on the bubble, i.e., not performing as we want them to. They could still make or continue their moves, but sometimes we feel it is better to put money to work in more fertile ground. We closed some of those last week, and will be watching who is playing along with the upside tomorrow and who is not.
Support and Resistance
Nasdaq: Closed at 1925.14
Resistance: The near top of the channel (1955). The second, higher channel hit in September is at 1975ish. Then 2000 to 2050, the early January 2002 double top.
Support: 1915ish, the September high. The 18 day MVA (1899). 1860 to 1865. The 50 day MVA (1840). The March/August up trendline (1830).
S&P 500: Closed at 1044.68
Resistance: 1057 (the August/September up trendline). 1050 and 1080 from February 2002 lows. 1100 to 1150, the early 2002 double top.
Support: 1040, the September highs acted as support Wednesday. The 18 day MVA (1035). 1030 to 1032 (early September highs). The top of the summer range at 1015. The exponential 50 day MVA (1018). 975 (December 1997 peak).
Dow: Closed at 9777.94
Resistance: 9800 (April and May 2002 lows) pushed it back again. 10,000 is the candle that attracts the moth.
Support: The 10 day MVA (9717). 9686 (September high) may act as some support. The 18 day MVA (9655). 9500 (June 2002 lows) is the top of the recent summer range. The exponential 50 day MVA (9496). 9353 (top of summer range). 9250 to 9236, the early June intraday high.
Economic Calendar
10-20-03
Leading Economic Indicators, September (10:00): -0.2% actual, -0.1% expected, 0.4% August.
Treasury Budget, September (2:00): $26.4B actual, $25.0B expected, $42.5B August.
10-23-03
Initial Jobless Claims (8:30): 385K expected, 384K prior.
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.
THE PLAYS:
New Plays:
Upside:
Play Date: 10/20/2003
AVAN (Avant Immunotherapeutics--$2.89; -0.06; no options): Diagnostic substances
http://biz.yahoo.com/p/a/avan.html
STATUS: Cup w/handle. Working on the handle of a 4.5 month base showing solid 4 to 2 accumulation (4 up price weeks on rising volume to 2 down price weeks on rising volume). That accumulation shows more buyers than sellers in the base and sets a good foundation for a breakout and run. Solid money flow and very good price/volume action. Making a nice test back to the 18 day MVA (2.79) on the intraday lows as voluje dries up. Looks to be near the breakout point.
Volume: 352.33K Avg Volume: 480.545K
BUY POINT: $3.22 Volume=721K Target=$4 Stop=$2.98
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/avan.html
Play Date: 10/20/2003
BRLI (Bio-Reference Labs--$12.3; +0.65; no options): Medical labs
http://biz.yahoo.com/p/b/brli.html
STATUS: Cup w/handle breakout. BRLI formed a 16 month base, broke out in late September, and looks to have just finished a successful test of that breakout. After moving over 12 in late September on the breakout, BRLI moved laterally, making higher lows along the 18 day MVA (11.30) as volume backed off to below average levels. Monday BRLI jumped off the 18 day MVA on very strong trade, a move that looks to be the start of the next leg after the breakout. Accumulation in the base was a solid 18 to 8, great price/volume action in the base, and a relative strength breakout (an indication of a strong breakout). Looking to pick it up here on a further move on solid volume.
Volume: 445.882K Avg Volume: 141.363K
BUY POINT: $12.65 Volume=212K Target=$15.25 Stop=$11.76
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/brli.html
Play Date: 10/20/2003
EVCI (EVCI Career Colleges--$3.25; +0.42; no options): Education and Training
http://biz.yahoo.com/p/e/evci.html
STATUS: Cup w/handle. Making the breakout from its 6 month base, EVCI sharply higher Monday on another sharply higher volume session. Strong 7 to 1 accumulation has set the foundation for the move. Strong money flow is still out ahead of the price and relative strength is moving up near a breakout. Nice move and looking to pick it up on this move.
Volume: 606.4K Avg Volume: 75.545K
BUY POINT: $3.29 Volume=125K Target=$4.25 Stop=$3.08
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/evci.html
Play Date: 10/20/2003
^SOXX (Philly Semiconductor Index--$473.47; +8.28; optionable): Semiconductor index
http://biz.yahoo.com/p/^/^soxx.html
STATUS: Test 10 day MVA. SOX tried to extend the rally last Wednesday but reversed so we took gains on that option play. It flopped to the 10 day MVA (466.46) Friday, but was leading the market again Monday. TXN's earnings energized the sector after hours. It will break sharply higher tomorrow, and though aggressive given the overall market action, we are going to look at some early positions, see if there is a good test that holds, and then pick up more positions after the test holds and the index starts to move back up. That test usually occurs within the first hour. It may well gap past our buy point, and if it opens up at 480 or thereabouts we will let it make that first test. After looking a bit shaky the chips are attempting to exert leadership and we want to catch the index on a further run toward 500.
BUY POINT: $475.38 Volume=627K Target=$500 Stop=$472.55
POSITION: SXX LO - Dec. $475c (51 delta)
http://www.investmenthouse.com/ci/^soxx.html
End part 1 of 2
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