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world stock market, us stock market
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12/09/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: DPAC
Trailing stops issued: TVIA; XLNX; ANT
Stop alerts issued: AMKR; CY; XLA; KEYN
MARKET SUMMARY
SUMMARY:
- Dow 10,000 for 10 seconds.
- Fed makes faintest hints at unwinding easy money some day, and market rebels.
- Nasdaq undercuts the 50 day MVA on rising trade. The test will tell the tale.
- Subscriber Questions
Early rise rolls over, picks up speed after the Fed announcement.
The market continued the Monday afternoon rebound and rallied ahead of the FOMC decision just as expected. Well, at least for about 10 minutes. Stocks opened higher, DJ30 hit 10,000, Mark Haynes donned his memorial hat, the market rolled over. It sold until the Fed announcement, rallied briefly, and then was treated to an old fashioned butt kicking in the last 2 hours. Volume was plodding along, breadth modestly lower, but after the FOMC gave the faintest whiff of the cessation of easy money at some point in the next decade volume jumped as stocks sold and Nasdaq breadth imploded. Nasdaq undercut the 50 day MVA, SP500 slipped below the November highs, and the small to mid-caps eased below the 18 day MVA on a further test lower in their uptrend channel.
Big techs struggled with many undercutting near support and several cracking the 50 day MVA as did the overall index (not an unusual occurrence). The key to watch now is how Nasdaq fares on the test of the 50 day MVA breach. Most stocks and indexes fail to retake the break of this level on the first try when the breach is accompanied by volume. Techs have been leaders and they are under the gun. The SP500, DJ30, SP400 and SP600 are in much better shape, but if Nasdaq breaks down, its gravity will pull those indexes with it to a certain extent. Certainly the market won't enjoy continued large overall gains as it has with Nasdaq and the smaller caps leading things more or less hand in hand. How the Nasdaq tests the 50 day MVA will tell the tale with respect to the near term trend. The tattered holiday rally is at best on the ropes.
THE ECONOMY
Fed indicates that some day rates will rise, but no time soon.
The Fed vaguely hinted at the end of easy money at some point in the future. It was so vague it almost took a bloodhound to sniff it out. The statement was pretty glowing. The Fed noted output was 'expanding briskly' and the labor market was 'improving modestly.' The probability of and 'unwelcome fall in inflation [deflation/disinflation] has diminished . . . and is almost equal to that of a rise in inflation.' The FOMC believes that the accommodative policy can be 'maintained for a considerable period.'
About all the Fed said about raising rates was noting that the things in the economy were better, not great, and that the risks of inflation to deflation were pretty much equal. That is good news as the economy is improving. At some point that will mean interest rates rise. They are rising on their own even with the Fed Funds rate held at 1%. That means the Fed can raise rates and still be accommodative because it is following the rates higher, not leading. If the Fed wants to kill off growth, it raises rates ahead of the market rates. As long as it lags the market it is accommodative. It can raise rates 100 basis points and still not catch the market, and that leaves money easy enough for the economy to continue to grow.
Market still does not like it.
Based on its reaction, the market does not seem to view it that way, and that is because there are other factors at work. The market is not panicking because of the fact the Fed will at some point raise rates. As discussed Monday, the Fed can talk about it for a long time before it ever does anything. Moreover, we said way back that the Fed would not think about raising rates until there was strong job growth. That has not occurred. The Fed will talk about it a lot before it does it, and it is still issuing statements with the 'considerable period' language. It takes a long time for the Fed to change its direction, and it is still in mid-turn.
The real problems are with the dollar. Continuing easy money is hard on a currency. The dollar started peaking when the Fed was cutting interest rates. When the Bush administration started winking and nodding about a 'strong' dollar it picked up the pace. There is always a critical point where momentum takes over with currency, and it did that the past month. What the market is worried about is another 20% or so drop in the dollar. That would really stress stocks. Foreign investors are already selling dollar-based assets at the fastest pace in years, and will sell even more if the dollar continues to fall. That is inflationary as more dollars come home to chase the goods that are already scarcer given the lack of production ramp up to meet the surge in demand as the economy recovers and optimism surges (IBD poll shows big December jump in sentiment). That is inflationary, and we know that inflationary environments are not good for stocks for a number of reasons, one being the Fed raises interest rates. Rate hikes slow economic growth and thus earnings, and also puts pressure on stock prices because there are other areas for investors to put their money.
As you can see, when you start messing around with the currency you stick your hand in the tar baby. After you get one part stuck you really make a mess trying to extricate yourself. You can see the big money corporations at work on the Bush administration with the likes of Snow and the former IP CEO as his Treasury secretaries. Same thing happened in the mid-eighties when the big corporations got the ear of Treasury and convinced them to push the dollar lower. Problem is, that is a smaller and smaller part of the economy, particularly with respect to jobs. The rest of us are hurt by a falling dollar, including all of those small businesses that produce 75% of the jobs. The market is very concerned that another quick dollar drop could occur and bring about the associated problems for earnings and thus stock prices. With the Fed saying easy money continues and not saying that it was doing so but also watching the dollar, money moved out of stocks, particularly techs in favor of the big cyclicals.
The fix? Make a quick intervention to support the dollar, initiated preferably by Treasury but the Fed would do. That would let the world know that the US stands ready to stand by its currency. Long term you don't bet against the dollar, but short term the administration's policies are making a negative bet a good bet, and, by the way, playing into the hands of George Soros who wants Bush out and to profit on his dollar shorts.
THE MARKET
The afternoon push lower sent Nasdaq and SOX below the 50 day MVA, the first major breakdowns since the uptrend began. Technically the uptrend is over as Nasdaq, the leader from the October 2002 bottom has broken its up trendline and the 50 day MVA. Coming after a very marginal higher high in the uptrend, the break lower takes on more significance as the signs of weakness are expanding. The SOX collapsed as well, breaking key support with many key large cap techs. It will take a Herculean effort to recover and build on this trend higher. A 50 day MVA breach is typically tested, and the outcome of that test is the key move in the trend.
Large cap techs were the whipping boys as defensive cyclical stocks were the beneficiaries again. Tobacco, paper, energy, chemicals, materials were up. Smaller caps were down, but they are hardly out. They slipped below the 18 day MVA, but are still well within the uptrend channels. They can test further and still hold the uptrend and rally all over again. As noted, however, if Nasdaq is being sold as investors turn more defensive, smaller caps will be hit as well as they are more thinly trades and speculative by nature.
Thus the money is not leaving the market wholesale. More selling occurred Tuesday, but money also continued to rotate as well. Defensive stocks, however, cannot lead the market forward, at least not for long stretches. Thus if Nasdaq cannot recover, we cannot expect the market to go much of anywhere even if the cyclicals perform better.
Market Sentiment
VIX: 17.63; +1.09
VXN: 28.32; +0.77
VXO: 17.08; +0.77
Put/Call Ratio (CBOE): 0.73; -0.20. The ratio surprisingly fell and fell sharply as Nasdaq fell solidly through the 50 day MVA.
NASDAQ
Fell through the 50 day MVA on rising, average volume, technically breaking the uptrend as it imploded in the last two hours.
Stats: -40.53 points (-2.08%) to close at 1908.32
Volume: 1.818B (+14.07%). Stronger average trade as large cap techs stops fell hard.
Up Volume: 395M (-441M)
Down Volume: 1.407B (+685M)
A/D and Hi/Lo: Decliners led 2.28 to 1. Breadth was running -3:2 midday, but then collapsed in the late selling to levels not seen since September.
Previous Session: Advancers led 1.13 to 1
New Highs: 168 (+19)
New Lows: 17 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq had no stomach for further upside to the 2100 level, the top of the early 2002 double top. It sliced through the 50 day MVA (1914) late in the session as volume rose to average. Nasdaq has broken the up trendline and now some key support at the 50 day MVA. It may continue lower in a follow through and then test the move. That will be the important move: regain the trend or give it up and start a steeper correction well below the prior double top. There is definitely upside if the index wants to turn and continue a rally into New Years. A correction here would set it up for the new year. We will let Nasdaq show us its move and respond accordingly. Tuesday we were closing positions that broke down through support, and let those that held up continue. After a test that fails the stage will be set for more downside.
S&P 500/NYSE
Gave up the November high but still in fine shape over the 18 day MVA despite some distribution.
Stats: +0.07 points (0%) to close at 1060.18
NYSE Volume: 1.408B (+18.66%). Volume jumped above average as the large cap index distributed and slightly undercut the November highs.
Up Volume: 410M (-328M)
Down Volume: 999M (+561M)
A/D and Hi/Lo: Decliners led 1.55 to 1. Modest negative breadth even on the distribution.
Previous Session: Advancers led 1.98 to 1
New Highs: 342 (+3)
New Lows: 7 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Gave up the November high (1061 - 1064) and the 10 day MVA (1061) but held over the 18 day MVA (1057). Despite the distribution, SP500 remains in good shape. It was under pressure with stocks such as INTC breaking down on volume though balanced by some of the big cyclical names. Holding up for now, but if Nasdaq really collapses it will find the 50 day MVA (1045) quickly. Still looking solid for now though under some distribution, it needs to hold the 18 day MVA to maintain its strength.
DJ30
Stats: -41.85 points (-0.42%) to close at 9923.42
Volume: 231M versus 193M
Continued to hold the move up the short term moving averages (9867 is 10 day, 9828 is 18 day) though it finished down for the session after a brief move up to 10,000. That is a psychological magnet and barrier once reached. DJ30 turned down with a modest point loss but on strong trade. That volume was assisted by stocks such as INTC that broke down on very strong volume. Officially a distribution session, but it continues to hold over the November highs as it continues its modest uptrend. Despite selling in its tech components, it is benefiting from the move into cyclical stocks, and that is holding it up as Nasdaq falters.
WEDNESDAY
Again the market could not handle what was good news by the Fed. With the dollar concerns and money supply that has been up and down the past two months, the market, while most likely fine with the continued easy money, has reservations about what could happen to the value of that money. There is little economic data out Wednesday, though that has not been able to avert the selling.
The key to the market will be the Nasdaq action. It broke the 50 day MVA slightly on some rising but just average volume. It was not a major breakdown what with the other indexes holding up quite well, though the SOX move was dramatic. There is a lot of downside momentum at the close, but as we have seen, momentum has not been a holdover from session to session. Still, we expect some downside follow through by Nasdaq before the important test of the 50 day MVA. Nasdaq made a marginally higher high and then fell through the trendline and the 50 day MVA; that is not a sign of a market that is going to turn right back up.
That does not mean it won't. This rally has had 9 lives, and with the other indexes holding up Nasdaq could resurrect itself. If it turns immediately higher on volume, great. We are not looking for that, and a low volume move back up into the range is fraught with danger. If that occurs we still focus on recovering small and mid-caps with good tests under their belts and the tech here and there that is made its own good test, held up, and is ready to move. At the same time we are watching the many stocks that broke their key support and rebound to test. If they fail that is a good entry point for downside plays. As you can see, a lot of action rides upon how Nasdaq responds to this uptrend breach.
Support and Resistance
Nasdaq: Closed at 1908.32
Resistance: The 50 day MVA (1915). The 18 day MVA (1942). The 10 day MVA (1944). The March/August up trendline (1955). November high (1992), December high (2000). The January 2002 double top (2044 to 2099).
Support: 1875 to 1880 is the bottom of the November range.
S&P 500: Closed at 1060.18
Resistance: November high (1061.40-1064). 1080 from February 2002 lows. 1074.30, the December intraday high. The December to June upper channel line at 1085. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: The 18 day MVA (1057). The exponential 50 day MVA (1045). 1030 to 1032 (early September highs).
Dow: Closed at 9923.42
Resistance: The March/September up trendline (9985). 10,000. 10,259 (January 2002 high).
Support: The November high (9903). The 10 and 18 day MVA (9868 and 9828). The October high (9850). The exponential 50 day MVA (9721). 9686 (September high; 9659 intraday). 9588 the early September highs. 9500 (June 2002 lows) is the top of the summer range.
Economic Calendar
12-09-03
Wholesale inventories, October (10:00): 0.5% actual, 0.3% expected, 0.3% September (revised from 0.3%).
FOMC meeting results (2:15): No change in rates. Output expanding, employment improving. Risks between lack of inflation and inflation balanced. Maintaining accomodative policy for "considerable period" of time.
12-11-03
Business inventories, October (8:30): 0.2% expected, 0.3% September.
Retail sales, November (8:30): 0.7% expected, -0.3% October.
Retail sales ex-autos (8:30): 0.3% expected, 0.2% October.
Initial jobless claims (8:30): 359K expected, 365K prior.
FOMC minutes (2:00)
12-12-03
PPI, November (8:30): 0.1% expected, 0.8% October.
Core PPI (8:30): 0.0% expected, 0.5% October.
Trade balance, October (8:30): -$41.8B expected, -$41.3B September.
Preliminary Michigan Sentiment, December (9:45): 96.0 expected, 93.7 November.
SUBSCRIBER QUESTIONS
Q: I am ignorant regarding the dynamics of big money rotation. Don't firms that sell stocks have to wait three days for the proceeds to clear before they can rotate the money? Or do they sell and buy again the same day?
A: Great question. When a stock or an option is sold or bought there is a closing date when the purchase or sale will be completed or as you stated, cleared. For stocks it is 3 days (the third day, counting the day the action was taken as day 1), for options one day (the next day). The transaction is considered made at the time of the purchase or sale, but you have the additional time to produce the money, stock, etc. Even with this 'float', you can buy and sell on the same day over and over using the same block of cash without ever having to produce more cash to cover the trades as long you don't make several buys without selling in between. In other words, if you buy then sell, buy then sell and never exceed the cash you have, you can do that over and over and it will all come out in the wash so to speak.
That is how day traders can move in and move out of many trades in a single day as they try to scrape the market without having to use margin. That is how you would accomplish dividend capturing as well: using the float you can buy before the close one day and sell the next morning and then move on to the next dividend play without having to wait for the transaction to completely clear. It sounds neat, but the tax rules that cut the tax rate on dividends also contained a provision aimed directly at those wanting to use dividend capturing: you have to hold the stock for sixty days in order to get that favorable tax rate. Otherwise it is the usual taxable rate. With the low dollar amounts you are looking at when dividend capturing, the tax law provides no change if you really want to use it as a way to make money. Thus many tout dividend capturing as a great way to make money with the new tax law, but if you are going to do it the right way, i.e., where it produces a steady income stream by making the turn every day or every other day, the tax law provides no help. You end up burning up your profits in transaction costs and taxes on the small amounts you are capturing.
We often use just one block of cash to do a lot of work for us. For instance, we can use it to buy a stock position we feel is going to appreciate and make us some nice change. While the money is parked in that stock we can still put it to work for us, getting the most bang for our buck. When the stock peaks out on a run, say one of its bounces up the short term MVA after the breakout is peaking, we can sell some at the money calls on our position. When the stock falls back and hits support we then buy the calls back and pocket the difference as 'rent' on our stock. We can also use that same chunk of cash that is parked in a stock we like and are writing covered calls on as collateral for selling puts in that stock or another stock we think is going to move higher. We sell the puts, let the stock rise, buy them back, and again pocket the difference. Thus, while we are riding a stock higher we can also take in income from call sales on the stock and put option sales on that or another stock that is set to rally. That way we squeeze the most out of our money as possible, something that is smart to do at anytime and particularly after the long downtrend.
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.
Tonight we are sending the report in 3 parts.
End part 1 of 3
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