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us stock market, trade stock
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10/29/03 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: BRLI; CVM; SOX
Buy alerts issued: LENS (bonus)
Trailing stops issued: None issued
Stop alerts issued: ODSY
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/alertttr.htm
SUMMARY:
- Sluggish hangover lifts late in the session.
- Waiting on Q3 GDP.
- Market caught between big rally and important GDP number Thursday.
- Brokers turning pessimistic, hedge funds still short.
Slow start gives way to modest gains on decent trade.
The market suffered a bit of a hangover from the Tuesday party, getting off to a slow start and bouncing between positive and negative. Pretty typical action after a big rush higher the afternoon before. Often on a rally to the close you see market makers and specialists running short on supply of stock as they were selling what they had as fast as the could in the rally to all the willing buyers. That leaves their store of stock to sell a bit low and in need of replenishing. They set the early bid and ask lower, trying to draw in some short term profit takers who go ahead and book gains just in case the market pulls a reversal. It does not take much to restore the supply, and then the market starts to resume its trend.
After that early and choppy morning, stocks did indeed resume their upside trend though the move remained rather tepid. The action also shows the basic trend the market wants to hold. In the void between the big rally on good news and the Q3 GDP report due out pre-market Thursday, stocks shook of some early choppy trade and rallied up to the close. It was also not just a lifeless drift. Volume was still solid and above average on the move, improving as stocks rallied in the afternoon. We were looking for a softer open and a move higher, and that is what it was. Not another massive surge, but given the big report due Thursday, not bad.
THE ECONOMY
Q3 GDP, jobless claims are next important data points.
Expectations for GDP are high. Official expectations have been bumped up to 6% and there is actually a whisper number of sorts that is looking for a higher number. Thus it is very important that the report deliver. We believe it will. Then we have to see the story behind the headlines. Was there any increase in employment related data, did businesses continue to expand their spending as reported in some key earnings reports (e.g., SPLS, ODP, AMD, INTC) and other economic reports (e.g., durable goods)? Those are the questions behind the headline even if the headline number meets expectations. We continue to look for expansion. Indeed, the first reports from Q4 indicate the same despite the pessimists who say the economy cannot keep pace.
Their reasoning is still tied to the 'one shot' economic stimulus idea. In other words, the economy received a one time boost from the child tax credit and home refinancing. We hear this every day, even from our brokers (more on that later). There is this common misperception that the only stimulus in the tax cut was the child tax credit increase. That misperception springs from an equally incorrect belief that economic recoveries only spring from consumer consumption. This view totally ignores the remaining stimulus, a lot of which is directed at the consumer as well.
Specifically, the marginal tax rates were lowered across the board, and that provides a monthly benefit. The refinancing boom may be ending, but those lower monthly payments are just that, monthly. That puts more disposable income in the pocket each month. Then there are the supply side effects, the lower capital gains tax, the dividend tax reduction, business investment incentives. Those are behind the rising business spending that the economic reports are showing even if the CEO's are mum on the issue. Those are also greater than one year, and thus provide another round of stimulus after this year ends. Indeed, there will most likely be a surge in corporate spending in Q4 to take full advantage of the incentives. It snowballs. As the economy recovers businesses are more confident about spending and thus take more advantage of the incentives. That helps improve the overall business climate further, encouraging even more investment.
The market feeds off of this data. It has been pricing in recovery since the October 2002 low, and the economic data have been backing that move up. The next step will be the jobs picture and whether the September report was a premature celebration or the signal that times are a changing. If the weekly jobless claims can continue their improvement around the 380K level, we will see the jobs report continue to improve. The October employment report is in fact out next Friday.
THE MARKET
The market put in a passable job Wednesday given the Tuesday surge and the important data out Thursday morning. Soft start, late rally, close on highs, solid though lighter volume that rallied in the afternoon with stocks. That is typically bullish activity where the market overcomes early adversity to rally to the close even if there is a void of data.
It was no blowout and accomplished little overall other than holding the gains in preparation for the Thursday GDP and weekly jobless claim numbers. The big three indexes are still below the October highs and have to deal with that immediate overhead to push the move forward. Of course, the SOX, SP400, and SP600 are all already over that level and at new 52-week highs. Those have been key leadership indexes the past year, and the fact that they are at highs and rallying further are indicative of underlying strength.
Market Sentiment
See 'Thursday' section for further discussion.
VIX: 16.43; -0.39
VXN: 24.72; -0.28
Put/Call Ratio (CBOE): 0.58; -0.17
NASDAQ
Edged higher on lower though solid trade. Chips led the way, and after GDP, the rest of the techs need to follow.
Stats: +4.3 points (+0.22%) to close at 1936.56
Volume: 1.978B (-5.47%). Above average but lower trade on a standoff session. It rallied as the market rallied in the afternoon. Not an accumulation session, but a decent showing.
Up Volume: 1.189B (-306M)
Down Volume: 748M (+176M)
A/D and Hi/Lo: Advancers led 1.61 to 1. Modest breadth on a modest day.
Previous Session: Advancers led 2.43 to 1
New Highs: 386 (+92). Not bad, but not the big surge yet. Looking for a big jump if Nasdaq can break the October high.
New Lows: 9 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower, traded up and down, then turned positive for a modest gain. Never tested near support (1903) or resistance (1966), just managed to come back from the early profit taking. That in itself shows its resilience and upside bias. It took a day off and left itself set up for the Q3 GDP out before the Thursday open.
S&P 500/NYSE
Tapped at 1050 on the high, scratching out a small gain as it also took a day off.
Stats: +1.32 points (+0.13%) to close at 1048.11
NYSE Volume: 1.513B (-6.9%). Volume backed off but was still well above average as SP500 tapped toward near support. As with Nasdaq, NYSE volume rallied in the afternoon as the index made two runs, fighting off one selling bout, and closing hear the session high.
Up Volume: 989M (-238M)
Down Volume: 514M (+124M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Very decent breadth as the small and mid-caps moved to yet another new high.
Previous Session: Advancers led 2.16 to 1
New Highs: 380 (+73). As with Nasdaq, need to see new highs jump when SP500 tackles the October high.
New Lows: 7 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
In a very volatile session the large caps started lower and surged into the early afternoon. Then over the course of just an hour they quickly gave it all back. Buyers came back in again, however, and rallied them right back up. On the high (1049.83) SP500 tested toward the October peak (1053.79) and faded some. It has done a good job in clearing the September high (1940). After this breather following the big Tuesday move, SP500 is in position to tackle the October high if the news is good enough.
DJ30:
Stats: +26.22 points (+0.27%) to close at 9774.53
Similar action to the other indexes, starting lower, overcoming a mid-session selling bout, and rallying back to close near the session highs. DJ30 volume was lower though still above average (225M versus 233M Tuesday). DJ30 sits just below the October high (9850), but we don't think this level will stop it. After the summer consolidation and higher lows over the 50 day MVA (9538), we anticipate that DJ30 will test 10,000 before the year is over and before any serious sell off.
THURSDAY
The market basically took a breather Wednesday, not bad action after the big run higher and before the Q3 GDP out before the Thursday open. As noted, the market is set up to take on the October highs. It can get a big boost from the GDP, but only if it is much stronger than the 6% expected. The good news has been anticipated by the market, and it has to be really good news to act as another bolt that sends buyers rushing back in.
Avoiding disappointment, we thus look for a move up to the October highs. At that point it depends on how many buyers have come to market. The indexes can clear the October highs and still have room for additional gains before hitting the resistance lines in the uptrends. That would help them make a higher high after the higher low, thus continuing the solid uptrend.
After the move off the 50 day MVA, some stocks have run well and are beyond buying into on this round. Others are just coming out of bases. Again we see stocks that set up well announcing positive results after hours and that looks like the catalyst that will send them to the breakout. Those stocks that are not extended and just making their moves are the better plays at this juncture though we also have to look at the market overall as that directs three-fourths of the market action. In short, there is still room upside before the indexes hit next resistance. That will allow some additional opportunity if the indexes manage the break over the October highs.
There are still many pessimists out there.
Last night we discussed how many television commentators were reading from the same script: 'Well, I am slightly bearish short term, but a bull longer term.' Of course the market powers higher on strong trade just as the twenty-fifth such interview concludes. We are hearing pessimism from our own brokers as well.
Last night I received a call from one of my brokers who was quite concerned. He wanted to sell most all long positions immediately. After listening for a bit I realized he had just come from a meeting where the brokers were 'briefed' on what may happen in the future. He was worried that 'something big' was going to happen that would totally melt down the market. He said he thought it would be the result of the dollar plunging. After all, he said, Buffet was buying foreign currencies, Soros had shorted the dollar, the economic stimulus was mostly over, stocks were way overvalued, etc. Basically, all of the arguments we have discussed the past few weeks that the bears swear by.
Yes the dollar could fall quickly and cause divestment of US assets. Yes many of these events could happen. I first told him that I was very reluctant about selling longs when the market just posted a big accumulation session off of a higher low at the 50 day MVA. He said the volume was due to selling of some of the big financial names and that the money was moving elsewhere. Not really the case. I then discussed how Soros has his own agenda, wanting Bush removed as president and putting up millions of his own dollars to help stir the pot and create issues that did not exist. Soros would gladly spend several million to make several hundred million on his currency trades. As for Buffet, we discussed how he was pushing his own agenda as well and in recent years it was obvious that he would say whatever he needed in order to influence his market positions and his social beliefs. After a half hour he started to rethink a bit. By the conclusion of the conversation we agreed to see how the indexes acted at the January 2000 double top levels as those would most likely be the key points where stocks are seriously tested in this rally. I indicated that if volatility shot higher as the market churned at those levels, then there was cause to worry and we could revisit his 'worse than 2000' bear market prediction. He was concerned that there would such a huge meltdown there would be no way out. When asked what he would recommend, he offered some gold stocks, claiming they were rallying because of the perceived problems. I asked if the rally could be because of improvement in the economies and the chance of inflation at some point. Again another new idea that had not been considered. I also threw in that the US dollar may weaken further, but with the US economy growing twice as fast as nearly every other economy, the US would still be a haven for foreign investment.
The point is simple though getting here was long. There are still a lot of pessimists that fear success after the bear market. They forget that periods of prosperity far exceed in length and frequency periods of decline. They forget to look to the market for the signals as to what to do. They look at some data and interpret it based on their viewpoint without looking at all the available data or any possible contra interpretations of that data. That is the basic downfall of many theories about what could happen: selective criteria that has occurred only very, very rarely. Basically he wanted me to sell on the possibility of an event that he had no idea when it might happen. I had the feeling of d j vu all over again form back in 1995 when this market just could not go any higher and needed to be sold. It ultimately reached the point where it did sell, but that was 5 years and thousands of points later. Moreover, the market flashed huge signals as it topped and started to roll over. It will show signals again if that occurs; it won't sneak in like a thief in the night.
Hedge funds still short.
There is still a very large short interest in the market after a year of rallying off the lows. Young hedge fund managers cutting their teeth in the bear market continue to think it will return. It might indeed return, but they have fought a very tough battle this year trying to stay short. Similar background to the younger broker discussed above: 3 years of bear market mindset has them viewing every rally skeptically. There is nothing wrong with that. Heck, we are accused of being too picky about each move. There is a studied purpose to that, however, in that we never want to be complacent about what the market is doing. We always want to look at the numbers two or three times in different ways to see if we are missing something. That helps you divorce emotion from your analysis. The problem the true believer bears have is the same as the true believer bulls have: they overlook the facts, or look at them horribly colored by that bias.
Again, there is a point here. The market is up solidly for the year with many stocks posting some even bigger, more impressive gains. A simple index fund will yield more than many hedge funds this year. With those funds charging 20% of the make, the yields will be very poor. What is going to happen is that hedge funds are going to lose a lot of their clients as they posted gains less than 10% (pre-fees) when the market soared. When they have to cash in positions to cover the exodus, that means covering shorts to raise cash. That adds further upside fuel to the market. In short, the negative bias of many of these funds has set up an environment that could cause the market to rally even more based on their very actions as they have to liquidate positions.
Support and Resistance
Nasdaq: Closed at 1936.56
Resistance: The near top of the channel (1960). October high (1967). The second, higher channel hit in September is at 1978. Then 2000 to 2050, the early January 2002 double top.
Support: The September high (1913). The 18 day MVA (1903). 1860 to 1865. The 50 day MVA (1856). The March/August up trendline (1852).
S&P 500: Closed at 1048.11
Resistance: 1054 (October highs) and 1061 (the August/September up trendline). 1050 and 1080 from February 2002 lows. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: 1040, the September highs. The 10 day MVA (1039) and the 18 day MVA (1036). 1030 to 1032 (early September highs). The exponential 50 day MVA (1023). The top of the summer range at 1015. 1010 the early September highs. 975 (December 1997 peak).
Dow: Closed at 9774.53
Resistance: 9800 (April and May 2002 lows) and the October high (9850). 10,000 is the candle that attracts the moth.
Support: 9686 (September high) may act as some support. The 18 day MVA (9666). 9588 the early September highs. The exponential 50 day MVA (9538). 9500 (June 2002 lows) is the top of the summer range.
Economic Calendar
10-27-03
Existing Home sales, September (10:00): +3.6% (6.69M actual), 6.30M expected, 6.47M August.
New home sales, September (10:00): -0.2% (1.145M actual), 1.125M expected, 1.150M August.
10-28-03
Durable goods orders, September (8:30): 0.8% actual, 1.0% expected, -0.1% August (revised from -1.1%).
FOMC meeting (2:15): No change (1% Fed funds rate), risk weighted toward lack of inflation, rates to be kept accomodative for a considerable time.
10-30-03
Initial jobless claims (8:30): 385K expected, 386K prior.
Employment Cost Index, Q3 (8:30): 0.9% expected, 0.9% prior.
GDP, Advanced, Q3 (8:30): 6.0% expected, 3.3% Q2.
Help wanted index, September (10:00): 38 expected, 37 August.
FOMC minutes (2:00)
10-31-03
Personal income, September (8:30): 0.2% expected, 0.2% August.
Personal spending, September (8:30): -0.1% expected, 0.8% August.
Michigan sentiment, revised for October (9:45): 89.5 expected, 89.4 in September.
Chicago PMI, October (10:00): 55.4 expected, 51.2 September.
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.
End part 1 of 3
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