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us stock market, top stock pick
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10/30/03 Technical Traders Report Update
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Technical Traders Report Subscribers:
On Tuesday and Thursday we issue a market alert and choice plays for the next session. Full reports issue on Monday, Wednesday and Saturday.
MARKET ALERTS
Targets hit alerts issued Thursday: None issued
Buy alerts issued: IDTI; CORI
Trailing stops issued: CVM
Stop alerts issued: NTES
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:
- Market gaps wildly on GDP number, but once again reverses the gains.
- Economic numbers rather dramatic, and the future potential is explosive.
- October highs stall gap higher as indexes churn again on rising volume, but still in decent shape.
- Subscriber Questions
Familiar theme where market can't handle good news.
More strong economic news led to another strong gap higher, and that led to another intraday reversal that gave back the gains. Again another rally lost, another breakout attempt turned back. That is not good action, but the market has shown this same scenario no less than four times over the past three months prior to the Thursday session. All the while the market has continued its uptrend. We are not saying that we can ignore this action, but it would be premature to conclude that the action indicates the trend is finished. There is a continuing internal struggle in the market, but it has thus far resolved that struggle internally while holding the strong uptrend.
THE ECONOMY
Q3 GDP soars 7.2%, and indications are it will hit another 6% number in Q4.
Expectations were high and the number was higher even than the whisper, posting the strongest quarterly gain in 19 years. Consumer consumption gained 6.6% (3.8% Q2), but the big story was in business activity. Business investment soared 11.1% after an already strong 7.3% in Q2. Equipment and software jumped 15.4% on top of an 8.3% gain in Q2. Government spending, the driver behind Q2, shriveled in Q3. That means this was a private sector growth story, and that is a sign of a healthy recovery.
Powerful numbers indicating the business recovery is well underway despite the CEO caution and the lack of positive economic coverage in the financial rags. That negative coverage continued even after these numbers hit the wire. Immediately the same names were out saying it was unsustainable, that Q4 would drop back to 3%. Again the arguments were the same: tax incentives over, refinancing done, no jobs. They are wrong. Growth in Q4 is going to be in the 6% range.
Q4 will be big as inventories are gone.
Some may consider that bold, but the numbers show this to be the case. Business investment will remain hot as businesses spend to take full advantage of the 2003 tax incentives before year end. The consumer is already showing he and she is strong in Q4 and will spend heartily on the holidays after two years of cocooning after 9-11. Inventories tanked $35.8B in the quarter while production hours worked continued to fall. Companies are selling out their inventories before making anything new. That will lead to a huge boom in Q4 and Q1 as stocks will be bare.
More next year as well.
What about that one-time, one-shot stimulus argument? Here is another factor to consider. There will be a huge chunk of refund money coming in Q1 and Q2 as taxpayers get back the excess withholding caused by the tax cuts retroactive back to 2003. Many refilled their W-4 forms, but just as many did not. It is currently estimated there is $100B on unrealized tax cut revenue that will hit during refund time early next year. That is twice what it was in 2003 and a load of stimulus. Thus, those who parrot the conventional wisdom that the stimulus is a one-shot event that fired its shot in Q3 are absolutely wrong. God bless them, however, because they keep that level of fear higher than it would be if everyone realized what kind of juggernaut the economy is going to be over at least the next two quarters.
NABE provides more proof.
The National Association of Business Enterprises conducted its quarterly survey and announced the results as well. 22% of respondents see rising capital spending, a solid gain over the prior quarter and the second consecutive quarter showing a net increase in spending. 46% expect to increase their capital spending over the next 12 months. They see demand increasing at the highest rates since Q4 of 1999. You remember Q2 1999? Gangbusters.
Weekly jobless claims post fourth straight week below 400K.
386K versus 385K expected and 391K the prior week (revised up). The 4-week average fell to 388,750 and that is down from 393,500. We said when the 4 week average hit near 380K it would start more serious job creation. It is heading that way but not there yet.
Economy is recovering sharply on all indicators, and jobs are not really behind schedule.
There are two main legs that the economic naysayers are standing on: one-shot stimulus will end and economy will slide back, and lack of jobs. We have discussed the one-shot fallacy already. We have discussed jobs as well, but there is something else to be said. The common argument is that the recession was over 18 months or more back and that jobs have not come around since. Regardless of what the textbooks say, the recession was not over until after the stock market began its rally in October 2002. That was the signal that the economy was bottoming and would start rising within 6 months.
Thus realistically we can look at Q1 2003 as the point to start the jobs clock. It is the market, not the economists, that set the time clock. That makes December of 2003 the first time to expect jobs to be created. This economy has surged so sharply, however, that net job creation started in September. It may not take off in October or November as it struggles to get on its feet, but the low inventories and surging business and consumer consumption are going to drive jobs in the start of 2004. No one believes it at this point, but early next year there is going to be a big surprise in job creation to the upside.
That prediction will land me a ton of emails, but the data points show us the same thing as in 1982 to 1983 and 1991 to 1992. In the early 1980's the oil boom went bust as it lagged the overall economy. No jobs out of college, energy companies shut down, mass foreclosures and bankruptcies. Then the tax incentives took hold and a rush higher ensued. In 1991 again there were mass bankruptcies, the tail end of the S&L scandal, and no jobs. When the dam broke, however, that corrected rapidly and millions of jobs were created. It never seems as if it will happen because certain job types are not coming back. There will be jobs, however, and as seen in the 1980's and 1990's, they were not flipping burgers or government busy work. Those relying on the lack of jobs to push their agendas will find that argument gone early next year.
THE MARKET
Unable to rally past the October highs, the indexes fell back to flat on high turnover. That indicates there were as many (slightly more) sellers than buyers on the session, once again keeping stocks overall from making any breakout. As discussed, however, that does not mean they are done as they are still very much in the uptrend and growth in the economy is expanding beyond expectations. The news was so good that many used the rush to sell (buy rumor sell the news), but as we have seen with individual stocks, after the idea becomes fact and they back off, they get right back in the game. Indeed that is what the market has done on each of the occasions it reversed on good news: edged back and then rallied again as it maintained the uptrend.
Bigger picture we are still looking for the upside to continue this year on up to the early 2002 highs where the indexes double topped and started the last nasty leg in the long downtrend. At that point they will encounter their strongest resistance of the move thus far and be in need of a more protracted consolidation, correction, or whatever name you like to pin on it. That could last 3, 4 or even 5 months and then give way to a rally up to and through the election on to the end of the year and into 2005. How is that for macro planning?
That does not mean it is a straight shot up to those January 2002 highs. AS we have seen the market moves up and down inside its channel as it continues to trend higher. It is approaching the top of the channel but is not there yet and thus has some further upside. As we have seen in the prior moves, it can show one of these reversals, fall back to test the 18 day MVA, and then complete the move to the upper channel before making the deeper test.
Market Sentiment
See 'Subscriber Question' section for a discussion of volatility in this market.
VIX: 16.33; -0.1
VXN: 24.74; +0.02
Put/Call Ratio (CBOE): 0.81; +0.23. The reversal brought out some more downside speculators.
NASDAQ
Gapped up over the October closing high but as it did at the last high, it reversed and sold off on rising volume.
Stats: -3.87 points (-0.2%) to close at 1932.69
Volume: 2.17B (+9.73%). Another strong volume reversal session. Those always have negative connotations as it shows the sellers were out in force pushing stocks back down after the early surge. That shows ready sellers each time the market makes a new high or tests one, but that also shows the fear level remains high and that has kept the market on the rise as overall there have been more buyers in the market than sellers.
We also not that up volume outpaced down volume on the session. That is a further indication that the move was not an out and out reversal and rout.
Up Volume: 1.178B (-11M)
Down Volume: 956M (+208M)
A/D and Hi/Lo: Decliners led 1.16 to 1.
Previous Session: Advancers led 1.61 to 1
New Highs: 448 (+62). New highs did not surge, but they continued to increase and approached a respectable level as Nasdaq approached the October high.
New Lows: 7 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq gapped higher and hit 1957 on the high, just below the October intraday high at 1967. It turned right back down and a midday rally attempt failed, closing the index at session lows. Another reversal as it tried to move to new territory, a common occurrence as it continues its uptrend. This is always a concern that puts us on alert for any further selling. It fails to make a higher high if it tests lower here, not necessarily a good technical sign. It can hold over the September highs (1914 intraday, 1910 closing) and the 18 day MVA (1906), however, make a higher low, and rally from there. May be wrong, but that is what we anticipate happening here.
S&P 500/NYSE
Ran right up to the October high and turned down, but it managed to hold mid-range as opposed to selling back to the session lows. Not great but a bit better than Nasdaq.
Stats: +0.06 points (0%) to close at 1046.94
NYSE Volume: 1.608B (+6.26%). Strong trade, but not as strong as on the Tuesday race higher. That is a good indication that the upside is still strong.
Up Volume: 799M (-190M)
Down Volume: 803M (+289M). As with Nasdaq, the up/down volume ratio was not bad.
A/D and Hi/Lo: Advancers led 1.01 to 1
Previous Session: Advancers led 1.75 to 1
New Highs: 451 (+71).
New Lows: 12 (+5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Ran right up to the October high (1054) and again reversed on high volume. That will have some screaming 'double top', and of course, that is a possibility. Double tops that result in sell offs, however, have low volume at the second peak. As discussed, the Tuesday rush higher was on the strongest volume of the move, indicating that buyers are still very much involved, still in control overall. Of course we have to watch to see if there is distribution on the way down, but as with Nasdaq, we are looking for SP500 to make a higher low at 1040 to 1035 (18 day MVA at 1038).
DJ30:
Stats: +12.08 points (+0.12%) to close at 9786.61
Big reach up to the October high (9850) on the Thursday high (9838) and then a big reversal. Managed a very modest gain on the close as volume rallied slightly. Again the double top look, but volume on the way up to the Thursday top was stronger. Volume disappears on double tops that roll over. As with the other indexes the pattern still warrants a lot of caution given the higher volume reversal. Given the accumulation, however, we are looking for a higher low over the September high (9686) or the 18 day MVA (9678).
FRIDAY
Some interesting economic reports out again Friday with personal income and spending, Michigan sentiment, and the Chicago PMI. After the GPD numbers the impact will be more muted, but they are important nonetheless as indications of further economic expansion.
The Thursday action sets up potential downside to test near support, but just as the Thursday gap was not something we wanted to see, a soft open may lead to buyers moving back in after the blowoff following the good GDP news. Remember, the news was super and regardless of what the pundits say, the market sniffs out what is going to happen in Q4 and Q1 2004, and the indications there are still excellent. Thus after the initial news and subsequent move was used for selling, we are looking for buyers to move in after a bit of a test lower. Many stocks remain in very good shape and not very extended even as the market tests toward the nearest resistance point.
Support and Resistance
Nasdaq: Closed at 1932.69
Resistance: The near top of the channel (1966). October high (1967). The second, higher channel hit in September is at 1980. Then 2000 to 2050, the early January 2002 double top.
Support: The September high (1913). The 18 day MVA (1907). 1860 to 1865. The 50 day MVA (1859). The March/August up trendline (1856).
S&P 500: Closed at 1046.94
Resistance: 1054 (October highs). 1059, the December to June upper channel line. 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 (1040) and the 18 day MVA (1038). 1030 to 1032 (early September highs). The exponential 50 day MVA (1024). The top of the summer range at 1015. 1010 the early September highs. 975 (December 1997 peak).
Dow: Closed at 9786.61
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 (9678). 9588 the early September highs. The exponential 50 day MVA (9548). 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): 386K actual, 385K expected, 391K prior (revised from 386K).
Employment Cost Index, Q3 (8:30): 1.0% actual, 0.9% expected, 0.9% prior.
GDP, Advanced, Q3 (8:30): 7.2% actual, 6.0% expected, 3.3% Q2.
Help wanted index, September (10:00): 37 actual, 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.
SUBSCRIBER QUESTIONS
Q: In a very volatile session [Wednesday] (the market seemed almost psychotic at times) as you describe it, both the VXN and the VIX went to or pretty close to new lows. I've read several explanations of what these indices measure, but on a day like today, one would think they should have increased. Can you explain them in ways that we can more clearly understand what drives change in them? Thanks.
A: Excellent question. Over the past few months we noted an increase in intraday volatility, particularly back in July and August when the market started to show some initial distribution after the strong run out of March. Even as the markets started showing this action, the volatiliy indexes continued to drift in their low ranges. Same thing happened to a certain extent on Wednesday.
While in theory the volatiliy indexes would pick up on this as they are derived from the volatility of an at the money, current expiration option on the SP100 (for the VIX) or Nasdaq 100 (for the VXN), the key to remember is overriding trend. That is what really impacts the volatility indexes. Nasdaq is still in an strong uptrend, and the intraday action Wednesday did nothing to change that trend. There was a lot of intraday 'noise' as the indexes moved up and down, but the overall trend was nowhere near threatened. This difference is something we pick up on long before the indexes would show it. That intraday volatility, however, is just an indication that a move is losing some steam. It is not a clear signal that there is going to be a selloff. It makes you cautious, but as we saw, the market can turn volatile intraday and still maintain its trend. It is another thing to factor in but not to make decisions on.
A lot of people are citing low volatility levels as measured by the volatility indexes as a reason to believe the market is going to sell off. That is one of the reasons the broker I talked about in the Tuesday report used as a reason to sell. As we have stated, volatility can remain low for long periods of time even as the market rallies higher and higher. Early 1998 and late 1999 are perfect examples of this as the market rallied sharply on low volatility. What you need to be looking for in these circumstances is not low volatility, but rapidly rising volatility even as the market moves higher. That is where that intraday volatility actually morphs into rising volatility on the volatility indices. When that happens there is real reason to be concerned and watch the price/volume action even more closely.
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 2
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