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11/04/03 Technical Traders Report Update
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Technical Traders Report Subscribers:
Tuesday and Thursday we issue a market alert and a few choice plays for the next session. Full reports issue Monday, Wednesday and Saturday.
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued. Let some good movers run.
Buy alerts issued: FALC; SCKT; PLXS
Trailing stops issued: RHAT (took the rest of a nice gain off the table).
Stop alerts issued: None issued
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:
- Indexes churn at resistance, unable to advance Monday's break higher.
- Chain store sales show 'unexpected' rise as consumers continue to release pent up demand.
- WMT wants a chip in every basket.
- Same market action: rally to resistance then churn.
Indexes trade flat on strong trade after starting the month with a sharp gain.
It is a pattern that has repeated several times during the past three months. The market advances to or above the last resistance point (i.e., makes a new high), and immediately stalls out on continued strong volume. Monday Nasdaq rallied on solid volume over the October high, Tuesday it gave back the high, stepping back with a modest loss but on volume equal to the Monday advancing trade. Technically that is not the healthiest action as it shows sellers, whether those shorting the market or just profit takers after the move) unloading stocks at that resistance level. There are enough buyers to keep the indexes from falling, but the high turnover indicates there are more sellers entering the market. If the buyers back off any, the market falls back.
Thus far that has not been the situation, i.e., buyers backing off. Indeed with new money still flowing into equity funds, each pullback has been used as a n entry point to put that money to work. That has continued the rally even as it has become more volatile the past two months even though the overall uptrend remains solidly in place. At some point that trend will take a breather and correct or consolidate for a longer period of time than just a 50 day MVA test. We have talked about this the past month. It is natural for a market to take a breather, and we know it happens after money chases stocks higher as it has been doing. In 1999 it was the tail end of the great run up based on the massive Fed liquidity injection. Other factors were in the mix, and that brought about the massive collapse in the market and economy (from 8% GDP growth to negative in short order). We feel the market will run out of gas on this leg when it hits, more or less, the early 2002 double top levels. That is a natural resistance level where overhead supply lurks. After a strong run that is showing signs of chasing stocks and weariness even though overall it maintains a powerful uptrend. That trend should carry it to those levels and then need a recharge.
Now some view today just as a repeat of 1999 to early 2000. They claim there has been no change in the economy, that valuations are too high, no real growth in sight, another bubble situation, etc. We talked about the broker calling all in a lather to 'sell now' after coming out of a meeting where one of the bears had trotted out all the arguments the market and economy are going to hell. Of course for each factor he raised there was an argument on the other side that was not considered. Now we see more and more advisors telling investors they need to get out or be ready to get out, some even saying do so between Thanksgiving and Christmas. This is the '1999 all over again' view. A couple of points to consider.
First, this is not 1999 all over again. That was the tail end of a dying economic boom. Stocks were in a climax run that showed itself in February and March 2000. Taxes had been raised to a point where they took out the economy's lifeblood (investment capital was not available for investment as it was taken by the government and became the much revered 'surplus'). The taxes combined with the Fed jacking up interest rates and drying up the money supply (after injecting huge amounts into the system ahead of Y2K) left the economy with nothing to run on. It seized up and collapsed. Now we have tax cuts sparking a market rally and an economic upturn that is much stronger than many still give it credit for despite the big Q3 GDP numbers. Money supply is flowing, cash is cheap, there are incentives to invest in business, the world economy is following the US economy's recovery, there are trillions of dollars to invest in stocks, business, and the future. It is the age-old cycle that is repeating.
Second, picking a date in the future as a point to sell is rather ridiculous. It is like knowing when a terrorist will strike or when a company is going to announce bad news and making a trade before that event. The latter is illegal and if they know about the former they should be telling the Homeland Security Department. The point is, just as with the economic cycles discussed above, the market has cycles. It can run only so far before it needs to rest. After a series of strong runs it needs to rest longer. The run up to the January 2002 double tops is a point that we view as a logical place to take a longer breather. It may occur before then or run past it and then occur. It is a point we are very aware of, but we also let the market tell us if it is in trouble. Bears sold out of the market in the mid-1990's or earlier. Huge mistake. They let their emotions rule and did not listen to the market. If the market reaches near the double tops and starts to distribute and volatility jumps higher, that will be a classic warning sign of trouble. Or if the market makes a pullback to the up trendline and then distribute and breaks the trend, that is a major signal of a change in character.
That could happen right between Thanksgiving and December. It could also happen next week, after the new year, or into spring. The market is still trending higher and showing overall good price/volume action and leadership. It isn't perfect, but it never is. Based on the market action, the only true indicator of market direction, there is nothing to indicate that a collapse of the type being hinted at is near. We can say for certainty that the market will have a more sustained correction. We cannot say when that will happen though reading the charts can give us ideas as to where (i.e., at what price levels) it may occur. Seasonal factors and the market trend point to a continued rise, but we will exercise caution as the indexes approach that major resistance point. To bail out while the trend is very strong could take potentially large gains off the table. That is as foolish as ignoring when the market starts to heave with volatility and distribute. Keep fixed on the market, the leaders, the price/volume action, and you will spot the problems and potential problems and have enough time to take evasive action.
THE ECONOMY
Chain store sales rise more than expected.
Most economists believe that the economy is slowing in Q4. No one is saying there will be 7.2% growth in Q4, but based on what our surveys are returning thus far, it is not going to be just 3.5% or 4% either. Another example of the underestimation of the continued expansion's strength is the weekly chain store sales. Yes it is a weekly number and can fluctuate significantly, but it has shown remarkable staying power week after week.
Indeed, the BTM/UBS Warburg weekly survey had showed some weakness but the past week recorded a 0.5% gain for the week (-0.9% the prior week) and a 5.1% year over year gain. That is a solid year to year move. Redbook showed a 1.1% gain in October over September and a 3.4% year over year gain for the same period. Those are not weakening numbers for a consumer that was supposed to have shot up all of its ammunition in Q3 by spending the so-called 'one-time' tax cuts. It should be noted that the reports stated the results were lowered by the California fires and sales at general merchandise stores at the end of the month that took away sales as shoppers looked for specialty items for Halloween. Thus the numbers could have been stronger, driving home the point that consumers are still consuming.
There is pent-up demand.
We have discussed it before, how despite claims that a shallow recession had not built up the big swell of consumption that is usually seen after a recession is over. There are a few things to remember about consumption, however. First, consumers always consume. It is not so much whether they consume, but whether they have concerns about the future that keep them from consuming as much as they would otherwise consume. In this recession there was a litany of problems that stomped on the consumer outlook. The election results were divisive and left many wondering just what would happen in the Bush administration. There was 9-11. The war in Afghanistan. The bear market. The corporate scandals. The Iraq war. It was not so much a deep recession that kept consumers from spending as much as usual, but a series of events that kept us worried about the future for a long period.
During that long period of concern about the future, there indeed was pent up demand. Sure we bought homes and 'cocooned,' but Americans like to be out and about, enjoy the country. We have seen airline sales jump back up based on the consumer this past summer. Car sales remained strong as consumer bought vehicles and started to drive around the US. What has happened now is that the tax cuts, market rally, and economic expansion have improved outlooks and consumers are spending more than expected. It was a long period of worry, and while we are not out of it yet, things are much better and the consumer senses that despite what some of the opinion polls say. The proof is in the results, and consumption is strong and getting stronger.
That is also being joined by the business side that is also now investing again given the incentives provided in the tax cuts and the economic expansion that is picking up pace. That is a powerful one-two punch that the economy has not seen for three years. There are not wholesale business purchases on going (e.g., no complete replacement of IT systems), but there is a solid increase in business spending.
Thus those that underestimate the economic growth and the ability to grow are looking at things from the prism of their economic textbooks. It is easy to see that the string of events we have encountered since 1999 are not found in textbooks, but the scholars have applied their cookie cutter formula and concluded there was no economic driver to push the economy higher. It takes a bit of creative thinking, some deductive reasoning, and some common sense to see how these events created the same situation as a deeper recession would have created. With the stimulus the economy has received, it is now powering out of the recession and is indeed in an expansion that is much stronger than anticipated by the textbook crowd.
The next thing will be jobs. The textbook gurus say jobs are late because the recovery from the recession would indicate they should already be here. As we have previously noted, however, the market did not bottom until October 2002, indicating that the economy would bottom sometime in the next six months. Jobs would not be created until December on that timetable, yet they are already being created ahead of schedule. We will see what the October numbers show, but if it too shows positive job creation, that is another piece of evidence that shows the recovery is actually stronger than expected.
WMT plans a boon for chip makers and for the jobs market.
There is a lot of talk about the new economy, and while the productivity numbers show the US is putting a lot of the technological gains to work, we have yet to reach the level where, as Demi Moore boasted in 'Disclosure', we are free our minds from our bodies and other grandiose predictions. Mobile computing is just now becoming possible, allowing you to take your notebook computer with you and get real time internet access while driving down the road (not recommended, of course) or fishing for trout.
WMT is taking a giant step toward putting this technology to work in a functional manner. It is going to have a radio chip on every piece of merchandise in its stores by the start of 2005. It will be able to monitor inventory, limit shoplifting, perform whole basket scanning for checkouts. Those are just the surface items. It will be much more efficient and attract customers through ease of use.
That gain for WMT will be a gain for chip makers as well. The world's largest retailer putting chips on each item. Billions, perhaps trillions of chips. THAT is an example of the new application of technology that will drive job creation. There is more demand for chips, product producers will need to meet this requirement and will need help doing it. WMT won't be the only one. Target will do it to keep up, BBY, etc. This is what we are talking about when we discuss new areas creating new and different jobs. It is happening and it will continue to happen. It is not different this time. It is the same cycle when there is a major economic upheaval.
THE MARKET
Same old story of rallying then churning at the resistance level. Stocks traded in a very narrow range on flat breadth, and unlike Monday they finished near the bottom of the intraday range, unable to make a late rally attempt stick. The leaders were the same: chips spurred on by the WMT news and the general good views toward chip sales in general along with small and mid-caps. The latter traded positive most all session before failing at the end while the small caps did manage an ever so slight gain.
As noted, this is not great action, but it has also not yielded to a stronger selloff during this uptrend. It is frustrating how the market has a hard time stringing together several solid sessions in a row, but as it approaches resistance, it has played out this similar pattern, again not yielding to the sellers when it does. There is talk of built up demand that the Friday jobs report could trigger if it shows strong enough job creation. We have the feeling that the Friday data will set the stage for the market move as it heads into the holidays. It is clear to all but the most stubborn partisans that the economy is expanding. The issue, at least to those feeding off the gruel of economists and gloomsayers, is job creation. It will come and is showing up, but it is not where it needs to be (100K+/month). If job creation slides back to negative (and thus is not job creation at all), that would be a blow to the market. We may see the market tread gingerly Wednesday and Thursday ahead of that number, trading in a narrow range between the near support (18 day MVA and the near resistance).
Market Sentiment
As noted above, many advisors are turning bearish, expecting a big decline before year end. If that notion grows enough, that in itself is a contrary indicator.
VIX: 16.55; 0
VXN: 25.69; +0.31
VXO: 17.42; +0.33
Put/Call Ratio (CBOE): 0.61; -0.02
NASDAQ
Opened lower, tried to rally, but could not hold a move back over the October high.
Stats: -9.74 points (-0.49%) to close at 1957.96
Volume: 2.106B (+0.35%). Volume edged higher, showing strong trade as Nasdaq showed a tight doji just below the October high.
Up Volume: 966M (-576M)
Down Volume: 1.1B (+566M). A standoff as the index did the same.
A/D and Hi/Lo: Decliners led 1 to 1
Previous Session: Advancers led 2.01 to 1
New Highs: 402 (-106)
New Lows: 10 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Not at the top of the channel, but flattening out some at the October high (1966.87) below resistance at 1976 (first channel line) and 2005 (second channel). It has shown dojis and churn during the midpoint of runs toward the upper channel lines on the last two runs to the upper channel, so we are not too alarmed by the action. Given the employment report due Friday morning, it may not be able to recapture the October high before then and traded between that level and the 18 day MVA (1920). As noted before there is not a whole lot to keep it from moving up to the upper channel other than a surprise in the Friday job report.
S&P 500/NYSE
Backed off from the gain but managed to roughly hold the October high though volume crept higher on the selling, giving it a whiff of distribution.
Stats: -5.77 points (-0.54%) to close at 1053.25
NYSE Volume: 1.376B (+2.04%). Volume edged back above average as SP500 sold back after the breakout over the October high. It indicates more sellers showed up again after a move to a new high. That makes 4 churning sessions in the past 15 trading days. This churn/distribution will eventually take its toll. Indeed, we are seeing more and more alternating accumulation sessions (up on rising volume) and distribution or churning sessions (down or flat at the top of the range on rising volume), and that is a sign of instability creeping into the market.
Up Volume: 505M (-520M)
Down Volume: 860M (+542M)
A/D and Hi/Lo: Advancers led 1.1 to 1
Previous Session: Advancers led 2.31 to 1
New Highs: 435 (-91)
New Lows: 6 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After breaking the October high (1053.79) SP500 immediately fell back to that level on slightly higher trade. There was no accumulation on the Monday move as it came on lower NYSE volume, and that makes the Tuesday selling a bit more concerning. Still, overall volume was lower than any of the prior accumulation sessions on the move up to this point. Thus it looks like a respite after a solid move up to this point. As with the Nasdaq, the employment report Friday will probably keep the index in a rather narrow range between 1045 and 1060.
DJ30:
Stats: -19.63 points (-0.2%) to close at 9838.83
Very similar to SP500, holding roughly a the October high (9850 intraday, 9812 closing) as it took a breather after breaking that level Monday. As with SP500, however, the move was on light volume while the trade picked up on the Tuesday selling. At this juncture it is nothing to get into a snit about, particularly as DJ30 is not a leader in this market.
WEDNESDAY
Factory orders and the ISM service index is out at 10ET, two moderately important warm-ups to the Thursday weekly jobless claims and Friday employment report. CSCO is out after the close Wednesday with its results.
The market continues its pensive action of posting a solid gain only to immediately pause as if to analyze what it just did. The trend is still firmly in place, but the indexes are closer to the top of the channel than the bottom, and if they are weakening the would make a lower high. As noted, the move up to this point was on strong trade, so there was no sign of weakening on the move up to the Monday high.
Whether it is ready to continue the move ahead of the employment report remains to be seen. Many of the Tuesday upside moves were continuations of prior breakouts and not new breakouts. At this stage in the channel we do not want to chase stocks that have already broken higher and put some distance on their breakout; best to catch them after the pullback to test the move.
That said, the looming jobs report Friday could give us exactly that scenario. Unable to extend the move over the October highs Tuesday and peeling back on some rising volume as well, the indexes could easily trade in a range ahead of that report, thus setting up some good entry points on a solid non-farm payrolls number.
End part 1 of 2
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