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world stock market, trade stock
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11/10/03 Stock Split Report Update
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Stock Split Report Subscribers:
On Monday and Wednesday we issue a market update and choice plays for the next session. Full reports issued Tuesday, Thursday, and Saturday.
MARKET ALERTS
Targets hit alerts issued Monday: EGOV
Buy alerts issued: PIR
Trailing stops issued: CFC; CELL; ERES; GNSC; NTE; NVLS; AV
Stop alerts issued: BBA; CPWM; CLKS; HAR; NEXM
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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Selling continues after Friday rollover on employment data.
- Holding near support on a slow pullback, trying to set up for another bounce higher in the uptrend.
- Stocks overvalued or just tired?
Friday pullback continues.
Compared to the past two weeks, Monday was devoid of news. Barron's was actually positive on IBM specifically and techs in general, but that did not help anyone other than IBM. There was a merger, but it failed to spark any excitement. There was simply no news big enough to hold back the slide to the short term MVA that started Friday as the market again tried to rally on strong economic data but could not carry through.
Overall the action was not that bad, with lower volume and the indexes holding over the short term MVA (mostly the 18 day MVA). That shows there was not a lot of dumping of stocks. Sure there were more sellers in the market, but relative to the buyers they were fewer. Thus while the move higher to end last week was on questionable volume, the selling Monday did not indicate a major sell off in the wings. Thus far it is showing a low volume pullback in the overall uptrend, and the big issue right now is whether it holds at the near term moving averages or tests back to the up trendline.
Stocks too 'expensive?'
One thing you hear each day there is a pullback is that there are concerns about how 'expensive' stocks are or some other derivation of the old 'valuation' argument. You know what we mean: "Stocks pulled back today on concerns valuations are too high." The statement implies (or actually, means) that stocks valuations are such that investors won't buy into them because the P/E ratios are high. In the uptrend, however, the market rallies for 2 to 3 weeks and then falls back to consolidate the move, then rallies again. If there were true valuation concerns, these little pullbacks would hardly be enough to shake out the froth. Valuation comes into play when the economy starts to peak and earnings start to plateau. When the upside cycle is over and earnings and the economy are going into a more prolonged contraction, that is when valuation concerns really take over and have longer term, devastating effects on stock prices.
With an economy still expanding and earnings showing solid increases with guidance for the next quarter and year showing solid increases as well, valuation does not play as big a roll. Investors are willing to bid prices higher in anticipation of a further expansion. No one really knows how strong the expansion will be as economists inherently underestimate the strength of a recovery or the weakness in a coming contraction (see the 2000 economic meltdown and the current recovery as the two latest examples). Picking what is 'fair value' when the underlying landscape is not even clearly defined is a losing proposition. Ask the bears that shorted stocks from 1995 to 2000, a period when stocks were claimed to be overvalued but just kept getting more so.
The point is they may be right but depending upon the type of market and/or economy you are in, it could not be the deciding factor. Stocks may get 'too expensive' and need to get a reality adjustment. The market is the synthesizer of all data and will ultimately reflect value based on current economic conditions, but it overshoots as well, and it can overshoot for years. Thus, instead of trying to pick what is 'value' when an expansion is ongoing, it is best to let the market tell you when it has had enough and is ready to correct. That does not mean value is never important. Coming out of the long downtrend we had scans that specifically looked for stocks in good patterns or position to buy that had low P/E ratios and other indicators they were a 'value' in a market that was trying to recover but was not there yet. It just has its place. In this current market with expanding earnings and economy and a market in a strong uptrend and not showing major distribution, calls that stocks are 'overvalued' is not the best indicator. Let the market do the talking on that one.
THE MARKET
So are stocks too expensive? Based on what the market action has been thus far that conclusion is premature. They may be expensive in the sense they have run up off the up trendline to near the top of the range and need a breather, but the indexes are not showing signs of major distribution or share dumping. If anything they appear tired after a good rally higher, characterized by their the inability to respond to good news. Stocks have run a long way without much of a breather, particularly on Nasdaq that has run up its trendline and 50 day MVA four (maybe 5) turns since breaking out of a cup with handle base in April. That is stretching the breakout a long way; stocks typically make 4 to 5 runs up the short term MVA (10 and 18 day MVA) after a breakout, then test the 50 day MVA after those runs. If the breakout is strong as on Nasdaq, it can make 4 or so runs up the 50 day MVA before needing a further correction in a base (e.g., GRMN from the October 2002 breakout). Moreover, Nasdaq hit almost 24% over its 200 day MVA on the last run higher, typically a point where it needs to take a breather.
In that light stocks can be considered expensive, but only in the context of having run hard in an otherwise expanding economy and uptrending market. That makes stocks extended and they will need a deeper consolidation, but not expensive in the sense they are ready for a major correction to basically end the uptrend as some are predicting. As always, they may be correct, but with an expanding economy, strong uptrends, and mild volume on the pullbacks, stocks are not currently showing they are about to plummet lower. Test lower in their trends, yes, but as for totally breakdown across the board, it is not showing that.
Stocks are in need of a larger consolidation, one they did not have in traditionally weaker September to October. At the same time stocks are seasonally strong from November to January. Thus while the market needs a longer consolidation, new money anticipating a typically solid November to early 2004 may make that self-fulfilling by chasing stocks higher after this current pullback is over. Given that, a test of the up trendline or 50 day MVA on Nasdaq would be the best action to set up that move and then correct in the spring. We would not be surprised at all to see the indexes undercut the 50 day MVA only to rebound as fund managers use that to put that money to work.
Market Sentiment
VIX: 17.62; +0.69
VXN: 26.49; +1.29
VXO: 17.95; +0.39
Put/Call Ratio (CBOE): 0.91; +0.13. The put/call ratio continues hold at high levels, climbing back into the nineties, a point that has resulted in market rebounds.
NASDAQ
Fell back to the 18 day MVA on lighter volume, coming down from the latest test near the top of the channel.
Stats: -29.1 points (-1.48%) to close at 1941.64
Volume: 1.764B (-10.34%). Sharp decline in volume as it fell back below average on some light trade, indicating no dumping of tech shares.
Up Volume: 459M (-472M)
Down Volume: 1.288B (+269M)
A/D and Hi/Lo: Decliners led 2.09 to 1. Downside breadth jumped higher as the fall from the test in the channel failed.
Previous Session: Advancers led 1.05 to 1
New Highs: 289 (-163)
New Lows: 18 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After tapping at the first upper channel line on the Friday high and fell back, Nasdaq continued its fade, falling toward the 18 day MVA (1934) on sharply lower volume. As noted, that indicates no dumping of tech shares overall and suggests just another pullback in the uptrend. It may try to hold at the 18 day, but it could use a pullback to the 50 day MVA (1883) that runs just over the up trendline (1880) to set up a better move heading into the end of the year. Despite the mutual fund issues, there is still a lot of new money yet to go to work that is ready to move in on the next opening. We will be watching if fund managers anticipate a holiday rally and start to put money to work after a slight undercut of the 18 day. If not, then a 50 day MVA test is in the cards and again, a good set up for a holiday rally.
S&P 500/NYSE
Continued to slide lower, falling to the 18 day MVA on lower, below average volume.
Stats: -6.10 points (-0.58%) to close at 1047.11
NYSE Volume: 1.214B (-13.45%). Lower, below average volume trade as the large caps tested back to the 18 day MVA. No distribution, just a lack of buyers to fend off the sellers.
Up Volume: 335M (-359M)
Down Volume: 878M (+189M)
A/D and Hi/Lo: Decliners led 1.84 to 1. Breadth expanding to the downside, but hardly getting out of hand. Small and mid-cap issues were under pressure and contributed the most to the increasing downside breadth.
Previous Session: Advancers led 1.2 to 1
New Highs: 216 (-252)
New Lows: 12 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A minor double top at the upper channel line in October has started a pullback in the large caps that continued Monday as the SP500 tests the 18 day MVA (1046). Up through October volume was solid on the upside move, but it has faded in November as it tested new high territory. No distribution on the way down, and thus it might try to make a stand at the 18 day or the September high at 1040. The lack of positive reaction to the jobs report, however, indicates that would be a rather mild dip. The 50 day MVA (1031) appears to be the likely point for another test given the lethargy shown on good news.
DJ30:
Stats: -53.26 points (-0.54%) to close at 9756.53
Sold through the 10 day MVA (9787) on the way to the 18 day MVA (9753) as the Barron's upgrade of IBM could not stem the tide. Volume fell back on the selling (172M versus 199M Friday) after reaching again at the year high on Friday (9903) and then reversing. As with SP500, a miniature double top this month made on lower volume. It rallied off the low (9736) to hold the 18 day MVA, but that was no show of strength. Next support is the September high (9659, closing) and the 50 day MVA (9614), and that would appear the next test unless fund managers use the test of the short term MVA to move back into positions.
TUESDAY
Another economically quiet session, particularly with the bond market closing in honor of Veteran's Day. Not sure why the equity markets are not honoring out veterans in the same manor, but we can expect some lower volume on the equity indexes because some big money won't be as active without the bond market.
The market remains pretty solid even with the mutual fund scandal and attacks in Saudi Arabia over the weekend. It is fairly clear that Al Queda has decided the Saudi ruling class will not come around and is going to try to foster an internal insurrection for their overthrow. That has some potentially nasty implications for oil prices and thus world economies; if internal strife stirs we could see oil start rising on the uncertainty and impacting the equity markets. For now the market is pulling back some, but no harsh selling as it thus far continues to shrug off potentially damaging news.
Without much volume it will not be as easy to get a read on any market moves here at support. There are features we will watch for including how the indexes respond to a test below the 18 day MVA. Typically you will see the test engender more selling quickly, but then there is a test. If the buyers return there should be a volume increase as it does. Overall volume will most likely be low, but we will be watching for the intraday trade as well. If it does rebound, is it able to clear the 18 day MVA again and rally further, or does it hit that level and stall? If it stalls out we will take more money off the table to lock in current gains or otherwise protect positions from further downside.
Again, the market remains in an overall uptrend, but the near term is the question mark as to whether it holds the short term MVA given the light selling volume or has to test deeper to the 50 day MVA. We will watch the action, and if it sells early and cannot recover, we will be defensive with positions that need protecting. On any early bounce off the 18 day MVA we will be careful to make sure we see volume on the plays we are looking to buy into as that may just be a reflex that fades out as well. In short, how the market trades around the 18 day MVA is our focus as to whether we move into new positions, ride current ones, or sell them. The market is in a soft pullback and we will be defensive until it gives a better indication of the next move.
Support and Resistance
Nasdaq: Closed at 1941.64
Resistance: October high (1967). The near top of the channel (1997). The second, higher channel hit in September is at 2022. Then 2050 to 2075, the early January 2002 double top.
Support: The 18 day MVA (1934). The September high (1913). The 50 day MVA (1883). 1860 to 1865. The March/August up trendline (1880).
S&P 500: Closed at 1047.11
Resistance: October highs at 1054. 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: 18 day MVA (1046). 1040, the September highs. 1030 to 1032 (early September highs). The exponential 50 day MVA (1031). The top of the summer range at 1015. 1010 the early September highs. 975 (December 1997 peak).
Dow: Closed at 9756.53
Resistance: 9800 (April and May 2002 lows). The October high (9850). 10,000 is the candle that attracts the moth.
Support: The 18 day MVA (9753). 9686 (September high). The exponential 50 day MVA (9614). 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): 364K 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): -0.2% expected. -0.2% September.
Retail sales ex-auto (8:30): 0.2% expected, 0.3% September.
Industrial production, October (9:15): 0.4% expected, 0.4% September.
Capacity utilization, October (9:15): 75.0% expected, 74.7% September.
Michigan preliminary sentiment, November (9:45): 91.3 expected, 89.6 October.
SEMINARS ON CD
http://www.stockseminarsonline.com
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End part 1 of 2
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