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world stock market, us stock market
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11/08/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: EGHT; NOOF
Buy alerts issued: CYMI
Trailing stops issued: None issued
Stop alerts issued: LOUD
MARKET SUMMARY
Big economic news again unable to provide sustained gains.
It is a theme that makes you a bit uneasy: the economy produces better than expected data that gaps the market higher, but there is no strength and the market fades again. Intuitively we know the market anticipates economic and earnings improvement well in advance, hence the October 2002 bottom in the stock market long before the economy started really kicking out good news. The issue was still very, very much in question when Nasdaq started its 70% run. Thus deep down we know that the unexpectedly good news was unexpected only to the economists that try to keep up with the data, something they, as a group, proved very bad at both at the downturn in 2000 and the upturn in late 2002, early 2003.
We had anticipated greater than 100K news jobs for October. Maybe the 200K+ that some predicted would have done the trick to propel the market to sustained gains, but maybe that is just slicing the potatoes thinner. After all, August and September were revised positive to show a 3 month gain of 286K; not quite 200K in one month, but a solid reversal of the -85K jobs lost per month from February to July. In other words, the market knows there is a solid economic expansion underway, has run well ahead of it, and is in the process of digesting the gains before it makes its next move. It does not appear to be in the breakout mode here, and gains to the upside will continue to be hard fought before it makes a more sustained pullback.
Even with the turn back from the highs it was not a total reversal. Economically sensitive stocks such (e.g., AA) and tech stocks tied to the Cisco end of the business (e.g., BRCM, PMCS, SCMR, etc.) performed quite well. Some sector rotation is ongoing, and that may benefit the large cap indexes that have lagged and are still well positioned for a move higher actually make that move. That remains to be seen; as of yet the other large cap indexes have not been making the moves without Nasdaq and the smaller cap issues leading the way.
THE ECONOMY
Jobs rise for last three months.
Thursday's jobless claims foretell even better job creation that seen in the Friday jobs report. That report blew past expectations (126K versus 65K expected). Better yet, August was revised higher to a 34K gain and September to a 125K gain versus the 57K originally reported. 286K net jobs in the past three months. Moreover, it was the private sector leading the charge again. Many critics to the Q3 GDP report were saying there was still no job creation even with the big economic burst. While July was still a drag on the quarter, there is little to complain about at this point as the trend higher has started. Indeed, the great drop in weekly jobless claims recently was not even part of the October jobs report. Thus there could be a very big move in the November report, boosted even further as stores gear up for what is going to be a strong retail season.
As we have oft noted, upward revisions tell the story, and the big swings from negative to sharply positive in August and September are telling a big story. August and September were strong for the economy and October, though a bit softer, showed the strongest dip in jobless claims and rise in job creation. Further, the workweek rose to 33.8 hours, and more impressively, the aggregate hours worked rose 0.4%. That is a lot of forward momentum and all of the employment factors appear to be coming together. Before year end, even in November, we could see 200K+ net new jobs.
Incredibly, even with the LAGGING employment indicator showing a solid turn, there were critics who even stated flat out that the economy was not improving. Not the usual question of 'sustainability' (i.e., good now but fading in Q4 and 2004), but simply not improving. That is denial, ignorance, or political. In some cases it is a combination of all three. We were pointing out the signs of improvement at the end of 2002 and early 2003, the war slowdown, and then the pickup heading through the summer. They were all pointing toward the recovery that the stock market was already building in. Factory orders, retail sales, regional PMI, national ISM, jobless claims, and now the lagging employment report all point to an accelerating economy with solid business and consumer activity. For some reason this rather historically normal recovery is viewed as a 'surprise.' It is the normal economic cycle, at least normal in the sense you have a Fed that destroys the up cycle that has to be reborn through tax cuts.
Wholesale inventories (September) climb 0.4%, indicating rebuilding already started.
Q3 GDP showed a dramatic drop in inventories, but even as the quarter wound down the inventory rebuild was already showing signs of starting. After a 0.1% drop (revised from -0.2%) in August, producers started churning out more goods to match rising business demand. Thus it did not show up in the Q3 GDP and is going to be a big part of Q4 and Q1 2004 GDP, keeping the economic expansion in very good shape. It was the sharpest rate of increase since March and was led by lumber and computer equipment. We saw the massive jump in construction, and thus the voracious appetite for lumber is obvious. And as CSCO demonstrated, computer and related equipment are selling well. We note that this quarter Dell is not running the slash and burn specials it was running right before the close of last quarter. Why? Because it does not have to; it is going to beat its number based on the current trend through quarter end so why cut.
Even though inventories were up, sales were up even higher with a 0.5% gain. Manufacturers produced more to meet demand given the razor thin inventories, yet demand trumped production again. That is the result of all of those new orders sub-indexes in the national and regional ISM/PMI reports: the orders are outrunning production right now. That put the inventory-to-sales ratio (the number of months to sell out of inventory at current consumption rates) at 1.20 months. That ties a record low. Put it all together and you have to ramp up production just to keep already low inventories holding steady. Again, that spells more good news for the coming quarters given the fresh appetite in business spending (furthered by year end buying to take advantage of tax incentives) and continued consumer spending.
THE MARKET
Still trading at the top of the range on the big indexes, still unable to advance the ball significantly on good news. The market has priced in a lot of the economic data, and the better than expected news is obviously not really that much better than the market expected. It is enough to keep it from selling off but not enough to advance the gains further. In the Thursday report we were looking for the jobs report to be the upside catalyst if the market was going to put on any significant further upside move. The immediate reaction was that the jobs data did not do the trick. We will see if there is a delayed reaction, but the upside may be mostly played out on this leg higher in the uptrend channel. There still may be some more gains to further test the upside channel, but the attendant risk at this level is higher.
The indexes remain in solid uptrends, but they are also near the highs in what have been normal moves within the channel. Nasdaq, the leading large cap index, has continued its nice trend up the 50 day MVA, but it is also showing problems when it reaches the top with high volume reversals. Again, further upside on this move may be hard to come by, but the bigger pictures shows Nasdaq is still well-entrenched in its uptrend.
Market Sentiment
VIX: 16.93; +0.19
VXN: 25.2; -0.15
VXO: 17.56; -0.02
Put/Call Ratio (CBOE): 0.78; +0.01. Has risen the past two sessions as Nasdaq moved toward the first upper channel line in its trend. There is some speculation that the market is going to pullback at this point in its range. Not a bad bet given where Nasdaq is in its range.
NASDAQ
Gapped up to test the uptrend channel but reversed and gave back the gain once again after breaking to a new high. Having a hard time finding a lot of new buyers at the highs.
Stats: -5.63 points (-0.28%) to close at 1970.74
Volume: 1.967B (-8.68%). Still above average but backing off all session. It was never an accumulation session even on the gap higher, but it was not a distribution or churning session either, a good indication there was no dumping of stocks on the reversal, just more profit taking at the next new high.
Up Volume: 931M (-559M)
Down Volume: 1.019B (+377M). Very close ratio of up to down volume.
A/D and Hi/Lo: Advancers led 1.05 to 1. Flat breadth on the session that finished basically flat.
Previous Session: Advancers led 1.39 to 1
New Highs: 452 (+84). Advancing issues still led higher as the Cisco contingent held their gains despite the market reversal.
New Lows: 13 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq gapped higher and ran right to the first upper channel line (1995), but that was all the jobs data could squeeze out of the news. After fading from the first move it managed a midday rally, but that was sold hard into the close. In the end it was a minor loss, but another reversal from a new high, unable to capitalize on good news. Not that Nasdaq is a sad case. It is still in a fine uptrend and it turned back on lower volume demonstrating no distribution, just a lack of buyers at the new high. It is extended, however, and it is a fight for it to continue on this move as it could not generate a gain out of the news everyone was supposedly waiting for. It can still rally further from here as the second channel line is well over 2000 (2020), but as noted earlier, the risk from here is higher as Nasdaq has run 150 points low to high on this leg and is 22% over its 200 day MVA (1612) on the Friday close. It struggles at 25% and hit almost 24% on the Friday high (1992).
S&P 500/NYSE
Rallied back to the early November high but that was all. It too reversed and fell back though no major selloff.
Stats: +0.03 points (0%) to close at 1053.21
NYSE Volume: 1.403B (-0.24%). Volume was still above average but backed off so no distribution on the pullback. Still, the past week volume was lower as the index moved laterally and tried the new high. It was solid moving up to that point but then died off as it hit the breakout level. That is a concern as lower volume shows a lack of buyers as it climbed to a new high. Without more buyers an index cannot continue to move higher. Not critical as it is moving laterally, but on any further move it needs volume.
Up Volume: 694M (-215M)
Down Volume: 689M (+193M). Standoff in volume.
A/D and Hi/Lo: Advancers led 1.2 to 1
Previous Session: Advancers led 1.4 to 1
New Highs: 468 (+115). As with Nasdaq, a nice advance in new highs even as the index backed off.
New Lows: 10 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped back at the early November high (1061), still below the upper channel line (1069), and then fell back to close right at the October high (1053.79). Though volume has been lower overall, day to day price/volume action is fine, up on the Thursday gain, down on the Friday loss. The large cap index is still in decent shape, in the early stages after the test of the lows in the summer range. It too, however, was unable to make any hay out of the jobs number, and despite some rotation into some big cyclical stocks, it is also near the upper channel line and may need to come back and test the uptrend at the 50 day MVA (1030) before continuing the move toward the end of the year.
DJ30:
Stats: -47.18 points (-0.48%) to close at 9809.79
Cleared the early November high (9896) on the high (9903) but then reversed and turned the gain to a loss on rising volume (199M versus 183M Thursday). As with SP500, DJ30 rallied up to the new high on solid trade, but now the volume has left. It takes new buyers to keep the index moving, and there were more sellers of the blue chips than buyers Friday, and more sellers than buyers on the up days all last week. Volume failed at the high earlier in the week and then rose as it reversed off the high Friday. It is holding at the 10 day MVA (9793) and has some support at the 18 day MVA (9753). If it is going to hold near support and not test again to the up trendline at the 50 day MVA (9608), that is where it needs to make its stand.
THIS WEEK
A lot of economic data, but the most important is retail sales on Friday. Thus there is a long week of relative quiet before things heat up with Dell's earnings after the close Wednesday. Again we expect DELL to at least meet expectations and most likely beat by a penny. It ahs been trying to manage expectations with its 'things have not improved much' statements but lack of cut rate sales ahead of the earnings this quarter.
So what happens with the market AJ (after jobs)? Again, Nasdaq is high in its range and has more risk at this level. Rotation into large cap non-techs could send the SP500 and DJ30 higher, but they have yet to show leadership strength, instead opting to follow along. Scanning thousands of stocks this weekend we did not see the same waves of issues ready to make breakouts or that were not very extended over the past month or so.
That makes this a period where we are very selective about what we move into. Nasdaq is at the first upper channel trendline, SP500 similarly situated. SP600 and SP400 are showing dojis after solid bounces up off the 50 day MVA. Again, the failure to make anything out of the jobs data that exceeded expectations is telling. Maybe there will be a delayed effect this week, but it will have to show it. We moved up stops tighter Thursday night and again in this report, particularly on those plays that are newer with no or without as much gain built in. For new positions we are looking at stocks in good patterns ready to breakout as those may be the rotation stocks where the money flows to. Breakout tests are also good ground as those are stocks that just started the move and are still early in their moves.
It is important to view the bigger picture as well, that the indexes are in solid uptrends. They are nearing the upper resistance in those trends, however, and unless there is a big buyside surge, the upside potential for the market overall is limited in this leg. The strong jobs news could not do it, so where the impetus would come from would truly be a surprise. There are times to put the pedal to the floor and times to be selective. Given where the leading Nasdaq and smaller cap indexes are in their ranges, it is time to be the latter.
Support and Resistance
Nasdaq: Closed at 1970.74
Resistance: The near top of the channel (1995). The second, higher channel hit in September is at 2020. Then 2050 to 2075, the early January 2002 double top.
Support: October high (1967). The 10 day MVA (1949) held Wednesday. The 18 day MVA (1934). The September high (1913). The 50 day MVA (1880). 1860 to 1865. The March/August up trendline (1875).
S&P 500: Closed at 1053.21
Resistance: Trading all around 1054 (October highs). The December to June upper channel line at 1069. 1080 from February 2002 lows. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: The 10 day MVA (1050) and the 18 day MVA (1046). 1040, the September highs. 1030 to 1032 (early September highs). The exponential 50 day MVA (1030). The top of the summer range at 1015. 1010 the early September highs. 975 (December 1997 peak).
Dow: Closed at 9809.79
Resistance: The October high (9850). 10,000 is the candle that attracts the moth.
Support: 9800 (April and May 2002 lows). The 10 day MVA (9753). The 18 day MVA (9753). 9686 (September high). The exponential 50 day MVA (9609). 9588 the early September highs. 9500 (June 2002 lows) is the top of the summer range.
Economic Calendar
11-13-03
Trade balance, September (8:30): -$40.5B expected, -39.2B August.
Initial jobless claims (8:30): 370K expected, 348K prior.
11-14-03
PPI, October (8:30): 0.2% expected, 0.3% September.
Core PPI: 0.1% expected, 0.0% September.
Retail sales, October (8:30): 0.1% expected. -0.2% September.
Retail sales ex-auto (8:30): 0.3% expected, 0.3% September.
Industrial production, October (9:15): 0.4% expected, 0.4% September.
Capacity utilization, October (9:15): 74.9% expected, 74.7% September.
Michigan preliminary sentiment, November (9:45): 91.5 expected, 89.6 October.
SUBSCRIBER QUESTIONS:
Q: I'm very perplexed over constant federal releases that there is no inflation in the US marketplace. My personal experiences and those of many of my close friends show a decidedly different picture. Recently I've experienced a 24% increase in my medical insurance premiums and a 16% increase in long term care premiums. My yacht coverage was recently increased 9%. My home security firm increased monthly fees 23%, and my dial-up ISP (which I use as back-up to my cable connection) increased monthly fees 21%. A national brand tea product which we've purchased for years was just increased 22% by our Kroger owned local market. These are whopping increases and mostly by national firms. So I doubt these increases are localized to our geographic area. I can't understand why these are not showing up in the federal figures. They're very real to those of us paying the bills.
A: You are absolutely correct that there are substantial increases in prices in certain areas in the economy, particularly healthcare-related. The coffee price increase is interesting given the glut of coffee on the world market. In any event, there are many areas rising but there are also areas wher prices continue to fall such as computers and other electronics. The government measures prices in the aggregate, meaning the declining prices offset the rising prices, to come up with its average.
The point you bring home, however, is that the prices that impact you on a regular basis are rising while those that impact you irregularly (you don't buy a computer every month) are falling. Jimmy Rogers, a famed investor who started with Warren Buffet, has the same common sense observation you had: prices are rising despite what the government says. This has implications on interest rates if the government is underestimating price rises. It could lead to an upside spike in prices and rates if demand outpaces supply.
We discussed this during the arguments over passing the tax cuts. There had to be enough supply side stimulus to get businesses producing to match the increased demand stimulus triggers. If not you then do get inflationary pressures because businesses cannot produce enough to meet demand. We are seeing some of that now with the low inventories and high sales. Businesses are investing, but they are not cranking out the huge amount of goods yet, and that is not helping pricing at this point. Businesses do not want to miss sales for lack of capacity or inventory, but after the sharp slowdown in 2000 they are reluctant to make the commitments. That is why it is important to maintain stability regarding taxation policy so business can at least know the tax rug will not be yanked out from under them if they commit to more production.
End part 1 of 2
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world stock market
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