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world stock market, us stock market
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11/15/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: TVIA
Trailing stops issued: RETK; SOFO; SINA; TXN
Stop alerts issued: SCMR; KEI
MARKET SUMMARY
Leadership stocks head for a deeper test, old economy searching for a breakout.
A somewhat frustrating week ended on a down note as the indexes failed another attempt at a new high and sold hard into the close. Nasdaq and SOX (semiconductors) were the downside leaders. Wednesday they tried to make a go of a breakout. That failed and Friday they were breaking near support. They lead up, they lead down. The issue now is how far and whether the other large cap indexes start taking some leadership role.
Specifically, the SP500 and the DJ30 have formed ascending triangles the past 6 weeks, riding up the 50 day MVA and more recently the 18 day MVA. The techs have led the move higher for a long run off of the March low, and with the breach of the 18 day MVA they look ready to test down to the 50 day MVA and the up trendline. The other large cap indexes have been holding up and forming those triangles. They are trying to set up for a breakout as the Nasdaq prepares for a test of the trendline.
A change of the guard? Probably not. Instead we expect Nasdaq to make the test toward the 50 day MVA this week, the other large cap indexes to shakeout. Just enough to get enough concerned about the end of the uptrend and then start a holiday rally. Thus the stocks that led the confidence in the rally back up could provide just enough unnerving selling to spark the seasonal move.
THE ECONOMY
Even with the Friday economic data that was found lacking, there is still reason for that seasonal move. Indeed, because the economic data was found somewhat feeble and there is a bit of fear that maybe inflation will run too high and the holiday sales won't be strong enough, the market will face some headwinds near term. Overall it remains solid, and after some pullback on fear those wanting to show gains for the year and get in on the run will move in and buy to chase the gains.
So what was the disappointing economic data? Retail sales and the PPI. Everything else was fine.
October retail sales ex autos in line, but disappoint.
Success breeds higher expectations, and after many upside surprises with the economic data, October retail sales that were in line failed to excite investors. Overall they were below expectations at -0.3% (-0.2% expected), but taking out weaker auto prices (not units, but prices), retail sales were in line at 0.2%. Indeed, September sales were revised to -0.2% from -0.4% and 0.3% from 0.2% ex autos. Looking at the bigger picture, October retail sales rose 6.2% year over year. That is a huge gain.
As we have discussed previously, October is a slow month. It is that lag between back to school and the holidays and business across the board typically slows. Thus to see retail sales post a gain in line with a solid September retail sales picture is not disappointing, it is downright impressive and presages a much better holiday season.
Michigan sentiment jumps more than expected.
Hand in hand, at least according to some, is sentiment. The mighty November Michigan sentiment survey assiduously compiled the responses of all its 200 respondents and found what others have already reported: sentiment is rising. 93.5 versus 92.0 expected and 89.6 in October. That is the highest reading since 96.9 in May 2002. Current conditions topped 100 at 102.8 from 99.9, the highest since March 2001 when the recession officially began. Expectations jumped to 87.6 from 84.
While the Michigan confidence survey may not be our favorite indicator, the trend it exhibits is indicative of the overall improvement in the economy. While the data has continued to improve, consumers have supposedly held back as demonstrated by the sentiment indicators. They are not starting to fall in line with the rest of the data. If they mean anything at all, that should help an even better surge in economic activity in the fourth quarter.
Producer prices jump in October.
0.8% overall and 0.5% ex food and energy. The government was quick to point out that if you also excluded autos the 'core' core rate was just 0.2%. Autos were mentioned because of new year models and higher associated prices that pushed the rate higher. You know, if you strip out everything you get a 0% rise. Gee, no inflation.
The data crushed expectations of 0.2% overall and 0.1% core. While this was not the consumer price index (CPI, out this week), it shows there is upward pressure in prices. As discussed in a subscriber question last week, it is a compilation of all goods and services that the government measures. Many of the cost of living items that we buy week in and week out are rising (beef up 18%) while infrequent purchases such as housing and autos, as measured by the government, are falling. Housing costs are based on a convoluted calculation of the cost of renting, and because low rates have made owning more affordable, rental rates have declined. Housing makes up over 22% of the weighting in the CPI, autos over 8%. If they are showing price decreases that 30% acts as a big counterweight to price increases in other areas.
Inflation is on the way.
ECRI (Economic Cycle Research Institute) is convinced inflation is here. We talked of inflation occurring after a recession when demand outstrips supply. A recovery is spawned, businesses hold back because they don't see recovery, consumer consume at an increasing pace as they see the recovery. Inventories get thin because businesses have held off producing and hiring workers to produce (the capacity utilization and production numbers released Friday still show a lag with production up just 0.2% (0.4% expected) and capacity at 75.0). Consumers have the money and want the goods, but there are not that many. More money chasing a less than adequate supply of goods. Textbook definition of inflation.
This is the precise scenario we warned of a year ago when talk of tax cuts centered on the demand side. As it turns out there was not enough supply side tax cuts to get businesses up and running quickly. Remember the first rounds of tax cuts were not retroactive and thus did not excite any businesses into spending right away. Moreover, there was really no business incentives in those cuts in the first place. Thus business did not invest and there was no improvement on the supply side as far as production. Why spend the money if you are not reasonably sure what you produce will be bought? You need an incentive to spend money when there is no real demand. The last tax cuts did have incentives, they were retroactive to 1-1-03, and they are working. Unfortunately they were too late in coming after two prior tax cuts were demand-side oriented, and demand looks to have moved out in front of supply.
The Fed realizes this even though Friday members were out again saying that rates would remain low because they saw no real inflation threats. Indeed the Fed can raise rates a bit and still be behind the real inflation rate. The key as to whether the supply side can catch up with demand is cheap money since the odds of more business incentive tax cuts are about on par with the Cubs or Red Sox even making it to the World Series in any given year. The Fed is telling everyone it is going to keep money cheap despite what the bond market is saying. Its hope is that it will be able to keep businesses confident money will remain cheap so they will continue to go out and make short, mid, and long range plans and 'catch up' to the consumer demand. Again the Fed walks the tightrope of time, hoping again it has enough. Last time it hoped the consumer would stay strong enough long enough for business to catch up. The last round of tax cuts, despite Greenspan's testimony to Congress that they would not help, did, by the Fed's recent admission, spark business investment. Without those cuts the Fed would at best still be hoping. Now it is hoping again that it has enough time to keep rates low for even more business investment. It is sending up flare after flare, telling business 2 to 3 times a week that it is going to keep rates low. It is rolling out the red carpet. It is pleading for business to spend. If it fails in this gambit, when interest rats do start higher they will explode higher in some very nasty inflation.
THE MARKET
The market tried to make renewed headway last week with a solid recovery rally Wednesday after selling down to start the week in a continuation of the previous Friday reversal. That sputtered and failed, and by the Friday close it had given back the run at a new high. Nasdaq and SOX fared worst, but as noted, the other large cap indexes are in decent patterns. Just decent because these patterns, while mostly bullish, can fail after such a long run in the overall market.
Those triangles are pinching off, moving in the last third of the pattern. They are going to have to produce or fail. Often they will shake out right at the end, i.e., selling off on lower volume, spooking out the easy sellers, and then rallying back when they are gone and providing the breakout. With Nasdaq, SOX, and even the small cap indexes (small double top) falling back, the SP500 and DJ30 could make a quick dip and then rally back.
The key on that move would be volume. Shakeouts come on lower volume, indicating fewer sellers. More a lack of buyers and the last quick sellers cash out. That sets the stage for the rebound as demand outstrips supply. That may be enough to shakeout the sellers that keep coming in when the market tries a new high. Things are setting up for a holiday move, but it looks as if it will take a bit more downside before it is ready. Thus we will be watching volume closely. Friday may have washed away the Wednesday rally, but volume backed off as it did. That tells us the sellers were in control for the day, but they were not stronger than the buyers. As the market is trending higher and has continued to show good accumulation that simply shows the market was taking a breather and that there was no real change in the overall uptrend character.
Market Sentiment
VIX: 16.94; +0.47
VXN: 26.16; +0.71
VXO: 17.63; +0.79
Put/Call Ratio (CBOE): 0.69; -0.09. After rallying to 0.96 last Tuesday ahead of the Wednesday market surge, the ratio has dropped quickly back down. What we want to see on a shakeout or other pullback is a quick rise close to 1.0 or more as Nasdaq comes back to test the 50 day MVA and the Dow and SP500 shakeout in their patterns.
NASDAQ
Gave back all of the Wednesday gain, undercutting the 18 day MVA for the second time in the week.
Stats: -37.09 points (-1.89%) to close at 1930.26
Volume: 1.833B (-2.49%). Lower volume indicates no dumping, but it was not far off of the Wednesday accumulation volume. Thus the sellers and buyers are still in a stand off near the top of the range. That is never conducive for further upside moves.
Up Volume: 321M (-555M)
Down Volume: 1.446B (+456M)
A/D and Hi/Lo: Decliners led 2.04 to 1. Downside breadth expanded on the order of upside breadth Wednesday. Again that stand off between buyers and sellers.
Previous Session: Decliners led 1.01 to 1
New Highs: 237 (-45)
New Lows: 11 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
An early jump over the October high was all Nasdaq could muster before it turned over and closed below the 18 day MVA (1940) for the second time in the week. One close below that level is not that bad as Wednesday showed; it can jump right back over that level. The more breaks it makes in close proximity, however, the more indication that further downside is coming. We call it hanging around in a bad neighborhood where some bad habits rub off on the index. Though volume was lower on the Friday selling it was on par with the upside volume Wednesday. As noted above, that indicates that the buyers and sellers are basically evenly matched here at the top of the range where 1975 has started exerting resistance. The failed Wednesday rally toward new highs, the second dip below the 18 day MVA for the week, and the evenly matched volume upside and downside indicate Nasdaq is ready for another dip to the 50 day MVA (1893) and up trendline that is right at the same level. From there we will see. It is in a long uptrend from March and has made at least four 50 day MVA tests since the breakout. That is getting extended on this run, but with the holiday season approaching, we anticipate another seasonal run higher after that test.
S&P 500/NYSE
Rallied to a new intraday high but rolled over and fell to the 18 day MVA. Good pattern, but this week will tell most of the story as to whether it is worth the looks.
Stats: -8.06 points (-0.76%) to close at 1050.35
NYSE Volume: 1.326B (-2.02%). Volume backed off on the pullback, but as with Nasdaq the upside volume and downside volume were evenly matched Wednesday to Friday.
Up Volume: 455M (-235M)
Down Volume: 873M (+216M)
A/D and Hi/Lo: Decliners led 1.4 to 1. Very modest declining breadth.
Previous Session: Advancers led 1.34 to 1
New Highs: 336 (+20)
New Lows: 9 (+1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps made a run at a new 52-week high, hitting it early intraday (1063.65), but then spending the rest of the session selling back in two big waves. On the low it slightly undercut the 18 day MVA (1049), but managed to bounce up and hold this key support on the close. This continues its 6 week triangle, moving up the 50 day MVA (1035) and more recently the 18 day MVA as it pinches against highs at roughly 1063. Accumulation in this pattern is solid at 4 to 2 (4 up weeks on rising volume to 2 down weeks on rising volume). It has tried the breakout three times the past month and each time failed. It thus may be set of that shakeout discussed above where it comes back a bit further, undercutting the 18 day and maybe even ready to test the 50 day MVA along with Nasdaq. If volume stays low it will then be ready for a breakout move and holiday rally. After that, a longer correction.
DJ30:
Stats: -69.26 points (-0.7%) to close at 9768.68
DJ30 is in a similar pattern to SP500, but it has some serious drag on it with WMT still selling on high volume and GE breaking its 200 day MVA on high trade. Volume jumped (222 million versus 205 million) as DJ30 tried a new high (9829) but rolled over. It too held the 18 day MVA (9770) more or less, but volume was back above average. It is still holding the up March/September up trendline but the higher volume selling puts that in jeopardy. Its 6 week triangle accumulation is 2 to 1, the same ratio as SP500, but just not the overall preponderance during the pattern. It shows the same picture, but it has some more turmoil below the surface, largely in part due to WMT. That is the very concern that we expect will impact the market with continued uncertainty this week before the holidays start a holiday move after shaking out the last sellers. With the higher volume it certainly appears DJ30 is heading for a 50 day MVA (9642) for a final shakeout attempt in the next week.
THIS WEEK
Once most got on board that the economic recover was for real that belief was jolted with WMT missing analyst expectations and producer prices climbing more than expected. The market had an obvious reaction as it rolled over from the top of the range again. We are expecting some aftershocks this coming week with the CPI on Tuesday. That is not expected to show the pricing increases the PPI showed yet as businesses still have not regained much pricing power. It may take until next year to see that happen but we do note that we will see components showing increases. Food is big. Beef prices are higher and the California fires caused some disruption from that major food producing state. Again the market looks at those components and extrapolate. That is what the market does.
Thus even with the Philly Fed manufacturing report, and the LEI out that could show surprise, the inflation fears will dominate and work to push the market toward next support. We discussed inflation possibilities above, but it is important to note that just a short time back the worry was deflation. A little inflation is good. The trick is to avoid dramatic jumps in prices. The latter is what has the bond market spooked and what is putting a drag on stocks the past week.
We are expecting some more drag this week with the indexes moving lower to test the 50 day MVA. The key will be the volume on the test; it should stay lighter overall. If it does then it will be set to make the rebound as it would just be some profit taking and shaking out of sellers. That does not mean we won't protect positions that are breaking down on rising volume. If they are in trouble they may not be rescued from a market bounce. Those that hold near support on lower trade are candidates to rebound and we will let them test. That move will set up a good rebound for additional positions to those plays as well as allow other plays to test breakouts or complete bases that would breakout when the indexes rebound.
Support and Resistance
Nasdaq: Closed at 1930.26
Resistance: The 18 day MVA (1940). 1975 is turning into some resistance. November high (1992). The near top of the channel (2006). The second, higher channel hit in September is at 2040. Then 2050 to 2075, the early January 2002 double top.
Support: The September high (1913). The 50 day MVA (1893). The March/August up trendline (1891). 1860 to 1865.
S&P 500: Closed at 1058.41
Resistance: November high (1062). The December to June upper channel line at 1070. 1080 from February 2002 lows. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: October highs at 1054. 18 day MVA (1048). 1040, the September highs. 1030 to 1032 (early September highs). The exponential 50 day MVA (1035). The top of the summer range at 1015. 1010 the early September highs. 975 (December 1997 peak).
Dow: Closed at 9768.68
Resistance: The October high (9850). The November high (9903). 10,000.
Support: The 18 day MVA (9770). 9686 (September high; 9659 intraday). The exponential 50 day MVA (9642). 9588 the early September highs. 9500 (June 2002 lows) is the top of the summer range.
Economic Calendar
11-17-03
Business inventories, September (8:30): 0.0% expected, -0.4% August.
NY Empire Index, November (8:30): 27.0 expected, 33.7 October.
11-18-03
CPI, October (8:30): 0.1% expected, 0.3% September.
Core CPI: 0.2% expected, 0.1% September.
11-19-03
Housing starts, October, (8:30): 1.850M expected, 1.888M prior.
Building permits, October (8:30): 1.850M expected, 1.875M September.
11-20-03
Initial jobless claims (8:30): 360K expected, 366K prior.
Leading Economic Indicators, October (10:00): 0.2% expected, -0.2% September
Philly Fed, November (12:00): 25.0 expected, 28.0 October.
11-21-03
Treasury Budget, October (2:00): -$72.5B expected, -$54.1B September.
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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world stock market
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