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world stock market, us stock market
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11/01/03 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: EVCT; SOXX
Buy alerts issued: EGHT; WFII
Trailing stops issued: TMWD
Stop alerts issued: RNDC
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:
- Solid week closes mixed.
- More excellent economic data to end the week as important sub-indexes show important gains.
- A year of gains as market slips through October with no selling, indicative of the strength.
No trick or treat on Friday, but a solid week even with Thursday reversal.
The market once again showed the extremes with a strong blast higher Tuesday and a reversal on good news Thursday. All in all a solid move higher after a good 50 day MVA test the prior Friday, but again, no breakout as the indexes show the same action they did in September, i.e., an early month high turning into resistance on the next attempt to take it out. As noted last week, that has the look of a double top, but the volume on the way up to that top was solid. Weak volume on the second ascent marks a double top. The indexes still look to come back after the Thursday reversal session, but as in September, the action does not at this point indicate any type of character change or breakdown.
Though Friday was dominated by gains in defensive stocks (oil, healthcare, candy) as some rotation occurred, the week demonstrated a resurgence in the smaller cap issues that have been such an important part of the rally. In addition, the SOX (Philly semiconductor index) enjoyed a big week on good news, and Nasdaq, the leader in the big 3 indexes, again led the large caps. It looks as if the second test of the October highs could trigger a bit more rotation that causes a pullback to test support, but the key leadership ingredients that have driven the market higher were again evident last week.
THE ECONOMY
Chicago PMI just below expectations, but employment sub-index foreshadows more job growth.
October Midwest manufacturing continued to expand and at a faster pace, with the PMI index rising to 55 from 51.2 in September. That was below expectations for a 55.4 reading, but still strong, a good recovery from September, and the improvement in key sub-indexes indicates even more strength in the report than the overall number, and more strength to come.
Specifically, the employment index surged to 53.1, 7.8 points over the September 45.3 reading. Remember, September is the month where job creation again started in the economy, ahead of schedule with respect to the recovery lag after the stock market projects the economy has bottomed. That was the best showing since January 2000. Another important harbinger of even stronger activity: inventories fell to 38.1 from 52.8 as manufacturers' inventories thudded lower. As with the Q3 GDP report, that indicates there will be the need for a surge in production to get just enough goods to meet current demand. Finally, new orders increased to 59.2 from 53.2, another healthy gain showing that future activity is still increasing.
To sum up the report, the 55 reading could easily turn into a 65 reading as crucial, lagging sub-indexes that have held the overall index down start to match the growth of the other sub-indexes. In addition, while many have called the September jobs growth number a fluke, the data points from all over the economy show that employment is turning the corner. It was rather amazing after the week of great economic data to hear the spin. One pundit with a political stance stated 'one day [Thursday] does not change the economy.' Laughable if not so misguided. The Q3 GPD number is for 3 months, not a day. It shows a surge on both the consumer and business side. Job creation is starting and the sub-indexes show that important element is staring to follow the rest of the economy as it always does. What is even more interesting is that the manufacturing indices, the area of greatest job loss, are showing job expansion now. The national ISM is out Monday, and its jobs index may not be positive yet, but as we saw earlier with overall expansion in manufacturing, the national follows where the regional indexes lead. One wonders what the gloomsayers will have to talk about economically when the jobs start coming in at 100K to 200K per month early next year. Even the Friday reports had changed their bias slightly, now complaining that the job market had not yet made a 'full' recovery. How quickly it has gone from vehement complaints of no recovery to no 'full' recovery. Subtle spin that sneaks in.
Sentiment continues its improvement.
Another fertile area of discord has been sentiment. After a brief lag in late summer sentiment is moving right back up. The revised Michigan report posted 89.7, up from 87.7 in September and the August 89.3. Current conditions rose to 99.9 from 98.4 while expectations rose to 83 from 80.8. Consumers spent when they were supposedly much less confident than now. You keep hearing the tired mantra that the slow job recovery is going to slow consumption. It would take much lower sentiment numbers to slow consumption, and the economic upswing and the sentiment reports themselves show consumers are confident about the future, so those low readings are not going to happen.
Q4 treated like a half-sister as economists overlook explosive potential.
October sales strong. Jobs creation coming. Vacations, convention business. Personal incomes
'GDP soars 7.2%, but Q4 expected much tamer.' That is the gist of just about every headline dealing with the economy to end the week. The idea is that the child credit rebates will be used up, consumers will have satisfied some pent up demand; you know, the usual conventional wisdom, inside the box thinking that seems to think that it just cannot continue. It is also the same limited thinking that looks only at the demand side while it is clear the supply side is what has driven the recent surge as it recovered while already strong consumer consumption held firm. We think the estimates are low. Maybe not another 7.2% quarter, but 6%.
Already October sales are showing strong returns. Malls are crowded and patrons are carrying packages. Friday showed personal incomes were rising, indicating more disposable income for the holiday season. The vacation business is surging. Convention business in Las Vegas and elsewhere is surging back to life. The regional manufacturing reports show job creation is expanding. Inventories are extremely low and will need to be rebuilt. That alone is going to add about a point to overall GDP. Businesses will take advantage of the tax incentives at year end as well, continuing the excellent surge in business consumption that belies the conservative CEO statements.
This of course is good news for the market as it has been factoring in the expectations. If it senses that the 4% GPD growth expectations are low, it will start again pricing in further growth, and that means a continuation of the rally.
Dollar worries continue to drive fears regarding economy, market.
There is a continuing belief that the dollar's weakness will lead to serious economic and thus market problems. As we have discussed over the past year, if dollar investments lose their position as favorites among foreign investors, those investments will be liquidated, sending more dollars back home (inflationary) and decreasing the value of US assets. That continues the cycle of divestment as assets and the dollar continue to weaken.
It is always dangerous to play around with the currency market as James Baker and company found out in the Reagan years. It did not cause a collapse as the gloomsayers argue, but it can set back your growth path if it goes too far. They want a weaker dollar because they think it will help the economy via exports. As the GDP reports have shown, there is a positive impact. It is not, however, the strongest driver of economic recoveries by a long shot.
Right now the dollar has declined for two years after soaring for three years. That gain pushed it to unrealistic highs against other currencies and made the US a major importer given the relative lower price of foreign goods. Foreign countries' economies have become dependent upon US consumption. The 2 year decline has put the dollar at its 1998 Q4 levels. This is when the Russian currency crisis hit and the market suffered a short bear market. The dollar double bottomed and rallied as the economy rallied out of that low. The dollar is trying to double bottom right now and rally with the economy.
That last point is key and is overlooked by the dollar doomsayers. There are healthy world economic indications unlike other recoveries. It appears that foreign economies are ready to recover with the US, the first time in decades the world economies have been what looks to be in sync. As they improve they will need more imports of our heavy machinery and other US items. That, along with the already weaker dollar further helps the US economy and thus the dollar. It is a situation where a weaker dollar helps the economy make the turn, then the dollar strengthens as the economy does the same. But with all economies growing, will US investments still hold the same allure and prevent dollar dumping?
At these levels the dollar is weaker, but it is not way undervalued. Even with other economies starting to recover, the US economy is currently growing at least twice the pace of other countries. Thus even if other economies recover and their currencies continue to strengthen, it does not mean the dollar will roll lower. With a faster expansion in the US economy investors will still seek the safety and opportunity of US investments, particularly with Russia flirting with old communist-style nationalizations of industries and elimination of political competition. That type of breakdown in the rule of law makes the US even more appealing. Even Germany is looking wistfully at US growth as its chancellor noted that the US has proved that tax cuts work. There is still a lot about the US for foreign investors to like. The dollar is showing signs of trying to double bottom here and climb with the economy. It is not something to ignore, but the press and doomsayers are distorting the dollar's relative strength and position, making the presumption that the aberrantly strong dollar during the last part of the 1990's is normal. It is not.
THE MARKET
It hardly looked like an October. Nasdaq +8.2%. SP500 +5.6%. DJ30 +5.5%. No breakdowns, no selloffs, no wild and scary action. Just a continued move higher in the uptrend that started in March. As we have discussed in the past, this ability to move through the seasonal patterns that typically result in substantial stock selling indicates there is real strength behind the existing uptrend. In other words, it indicates that it is not hanging on by a thread and ready to collapse after a year of gains from the low in the long downtrend.
On the other hand it did not clearly breakout and surge. That is not bad, however, as the market continued its steady uptrend, working higher with periodic tests back to the up trendline. Given the alternative of a harder selloff that is very nice action. Why would the market have ignored selling this season? Primarily it is money. Even after a year of gains, until the past few months new money had held back. That started to change around August when you started to see money enter the market more or less on each dip. Institutions have used the dips to put that money to work, and thus the indexes skated through September and October with the pullbacks being confined to the uptrend. Some call it overbought, and it may be, but we said back in the spring when people doubted the rally off the October lows would hold up that there was a lot of fuel for the market ton continue its move if it could make the next breakout. That fuel has been slowly pulled in as the market rose higher.
Nasdaq and the smaller cap indexes have been the clear leaders and arguably they are overextended. The healthy aspect of this move, however, is that money is not leaving the market, just moving around some. On Friday money moved to defensive areas such as healthcare, drug-related, oil services and exploring, candy makers even as some of the leaders in tech and internet edged back in some profit taking. None of the indexes broke down or sold on volume. That is indicative of rotation where money moves from one sector to another. Investors don't want to take money out of the market because they feel it is still going higher, but they don't want to be in areas they feel are overextended.
The areas they left, however, did not sell on high volume. As we have seen again and again, that means after they come back for a test of support money most likely flows back in. Some leaders were falling on lower volume Friday (EBAY, AMZN, etc.), as they fall back after a test of the October highs, looking to find near support and try again much as they did in September where they failed to take out the September high but did so after a test lower and subsequent rebound. We think the action Friday coincided with the end of the month where some big institutions booked some gains on their strong movers but put the money to work elsewhere until the leadership tests back to support and is ready to provide another entry point.
The market has a lot of fuel still on the sidelines even as more and more comes into the market. Bigger picture we still see the market moving up to the January 2002 double top highs on this rally before slipping into a longer consolidation/correction. After a pullback by the leaders to test near support we feel they will be ready to move higher again toward the end of the year and close in on those levels as the economy continues its expansion.
Market Sentiment
VIX: 16.1; -0.23
VXN: 24.89; +0.15
Put/Call Ratio (CBOE): 1.12; +0.31. Put activity shot higher Friday. That typically indicates too much downside speculation and can suggest a turn higher. Given it was the end of October and the market escaped without a selloff there could have been some put covering. Either way it shows there is still a high level of speculation regarding the market's advance coming to an end, and that contrary indication suggests the market will be ready to move back up after a modest pullback here.
NASDAQ
Flat trade after the Thursday reversal near the October high. Ready for what appears to be a modest pullback.
Stats: -0.48 points (-0.02%) to close at 1932.21
Volume: 1.845B (-15.01%). Contracting volume as Nasdaq held steady after a high volume Thursday reversal squelched breakout chances on this bounce.
Up Volume: 1.007B (-171M)
Down Volume: 790M (-166M)
A/D and Hi/Lo: Decliners led 1.07 to 1. After some strong upside breadth early in the week, breadth contracted as some weakness set in Thursday and Friday. That is positive action for further upside.
Previous Session: Decliners led 1.16 to 1
New Highs: 296 (-152)
New Lows: 9 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After reaching up toward the October high (1967) Thursday and unable to make the next break higher Nasdaq spent Friday quietly. In September it made a failed breakout and had to test the 50 day MVA (1862) before making another 52-week high in October. While the Thursday reversal was on high volume, the move up to that point was strong as well. Thus there may not be a full test of the 50 day MVA on this pullback but instead the September highs (1914 intraday, 1910 closing) and the 18 day MVA (1909). If it can hold there it has set a good launching point for the run at the October high.
S&P 500/NYSE
Failed right at the October high but managed to hold over half the session gain on lower though strong trade.
Stats: +3.77 points (+0.36%) to close at 1050.71
NYSE Volume: 1.444B (-10.2%). NO accumulation on the session but a solid volume day once again as NYSE has shown above average volume for the past two weeks.
Up Volume: 763M (-36M)
Down Volume: 654M (-149M)
A/D and Hi/Lo: Advancers led 1.26 to 1
Previous Session: Advancers led 1.01 to 1
New Highs: 290 (-161)
New Lows: 2 (-10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Another attempt at the October high (1053.79) stalled, but there has been no rollover. Thursday SP500 churned on rising volume but did not immediately sell off. There was movement into more defensive sectors as well as financials that held it up. The action was nowhere near as severe Thursday as on Nasdaq, and it too climbed up to the October peak on strong trade. In other words, stocks were under accumulation early in the week, and the reversal did not change that. It also may provide a further test lower after the move with the 18 day MVA (1039) a likely choice along with the September high (1040). It could slip to the 50 day MVA at 1025, but the action does not seem to suggest that at this point.
DJ30:
Stats: +14.51 points (+0.15%) to close at 9801.12
Tried the October high for the second session and again fell back. Once again, however, it managed a gain on the session even after giving back the intraday high. It is well positioned to make a breakout over the October high (9850) as this double top in form lacks the substance as DJ30 rallied up to this point on strong volume as well. A test of the 18 day MVA (9691) or the September high (9686) it would be ready to make the next breakout attempt.
THIS WEEK
Earnings fall to a trickle but the economic news hits an important milestone for just about everyone, specifically the October employment report. Those that are students of the market and the economy know it is still too early to look for strong job creation, but the entire world is looking for it. It is not time for the big upside increases that will make a difference, i.e., 100K+ net new jobs per month, but at least the market is not expecting that. As noted Thursday, we are looking for that more substantial job creation to start December and the first quarter 2004.
The market will be looking toward the employment report all week, but Monday there is also some important economic data with the national manufacturing report (ISM). That most likely won't show the expansion in the employment sub-index of the Chicago PMI and may be somewhat of a disappointment to an impatient investor group.
What this eye on Friday means is that the market could make that pullback to make a higher low in anticipation, then start to move up in anticipation of the Friday report. Many plays continue to perform well but we expect a pullback as some additional rotation continues to while some of the leading sectors and stocks take a breather (chips, nets, software) ahead of the employment data. That should provide some good opportunity later in the week.
End part 1 of 3
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world stock market
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