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us stock market, trade stock
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12/13/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: SATH; FLDR; QCOM; AVX
Trailing stops issued: None issued
Stop alerts issued: None issued
MARKET SUMMARY
Late recovery is promising but little volume.
A lower than expected wholesale price report helped stocks to an early lead that evaporated as fast as it started. Fifteen minutes into the session the Michigan 200 sentiment survey hit. It missed expectations but over 6 points. Even though it was in contrast to many other surveys and is notorious for taking the wrong pulse in is preliminary survey, the market took it the wrong way and the selling accelerated. Nasdaq undercut the 18 day MVA but held over the 50 day MVA while SP500 held over support at 1064. That caused the shorts to start covering again (Thursday rally closed out several) and turned the market back up.
The market rallied the rest of the day. Rally is not really the right verb. Struggled higher, scratched out a gain, drifted higher, melted upward. The volume was low, the breadth narrow, but the indexes caught a late bid and spurted higher in the last two hours, closing at session highs. No volume, weak breadth. The best part was the small cap leadership, posting a 0.8% gain versus the 0.3% across the board for the rest of the major indexes.
All but the SOX. It posted a slight loss (-0.1%), showing a doji (an indication of a momentum shift) right below resistance at 500. There were some good rebounds from the selling early in the week; after all Nasdaq did reclaim the 50 day MVA earlier and is still holding it. Those rebounds continued Friday. The chips tend to be a market barometer, leading the moves both up and down. The pattern forming is not the best, and with the market action more volatile with its up one day, down the next, SOX could be signaling trouble for the holiday rally attempt. The small caps still look ready to continue the move higher, but they won't be able to turn the entire market if it starts to crumble.
THE ECONOMY
What is the current sentiment?
The December Michigan sentiment preliminary survey, the Michigan 200, was released to its subscribers and showed a marked reduction in sentiment at 89.6 versus 96 expected. Expectations had their biggest drop in 12 years. Coming off a Q3 that great 8.2% and other recent sentiment reports showing solid, continuing sentiment improvement, the Michigan report appears out of sync. Indeed, back in the summer this same scenario played out: IBD and other polls showed improving sentiment while the preliminary Michigan report showed declines. The final report ended up showing gains when the statistical sample was at an appropriate level, not the first 200 respondents that receive a free 'treasures of the upper peninsula' coupon package that make up the preliminary report. Is everyone out of step but Johnny (i.e., Michigan)? Of course not.
Every indication is that the economy is expanding and not just recovering. Consumers are, not were, but are, spending more as the retail sales increase shows, not to mention the many empty shelves where holiday decorations have been sold out. Decorations are a 'luxury' that Americans have skimped on the past two seasons; this year they are putting on the ritz and glitz once more.
Then go to the source. Small business owners, the largest employers in the country and the fastest growing part of the economy right now, are very optimistic. The National Federation of Independent Businesses just released its November survey results. They posted a 105.3 reading, a record. Those expecting the economy to improve over the next six months clocked in at 51%, the best gain in 20 years. While this covers businesses as opposed to consumers, realistically small businesses are very close to consumers because their owners are consumers themselves, closely tied to and aware of the consumer and his or her demands. This surging optimism means they are willing to take more chances, e.g., buy more equipment, hire workers. You know, just what a strong economy needs.
Producer prices for November drop.
After a 0.8% gain in October, wholesale prices fell 0.3% in November. The core fell 0.1% versus 0.0% expected and 0.5% prior. As you can see prices are getting somewhat volatile. Some heralded the drop in prices as vindication to the Fed's statement included with its rate decision on Tuesday indicating that there was no threat of inflation. Much rejoicing. Recall, however, that volatility signals change. We saw volatility in the economic indicators just before they started posting an improving trend. Volatility is how trends show they are shifting. The producer prices are showing this and they are suggesting higher prices are coming even without looking at the cost of commodities and other raw materials.
The Fed continues to promise to keep rates low in order to keep the economic stimulus going. Remember, it is legacy building right now, trying to insure Greenspan's place in history. A roaring economy would help that. Also, there is an election year coming. Is it any coincidence that the Fed implied that it would keep rates flat for the entirety of 2004? It typically does whatever it can to step aside in election years; it is telegraphing that is its intention for 2004. If things roar it may need to step in, and it left itself that wiggle room, but things would really have to race ahead, maybe even along the lines of 1999 before the Fed would act.
That may be an exaggeration, but the Fed is stepping aside, at least in its spoken or written word. We have discussed money flow the past two months off and on. Money supply has been the same, off and on. After surging when the Fed was continually worrying over 'the lack of inflation' (you know, deflation), money supply had become spotty, up some weeks, then shrinking noticeably other weeks. The Fed exerts a lot of control over this. Certainly some was due to cash assets being turned into other physical assets in the form of investments in the recovering economy. That is healthy. The volatility of the number, however, shows there are other forces, namely the Fed. Even when the Fed was lowering rates early on to stimulate the economy, it was keeping money supply too tight. Thus the rate cuts did not produce the expected economic increases. The money was there for all to see, but it was behind the glass, unattainable. Low interest rates mean little if there is no way to get to the money.
Thus the Fed is talking the easy money game but it is not as free and easy as it lets on. It is good PR, but the money supply is key to the availability of funds. Cheap money in theory does not make an economy run. It has to be reality, tangible. We will see if the Fed will keeps the money coming and thus really gives the economy the chance to continue the expansion.
THE MARKET
Another late rally similar to Wednesday closed stocks near session highs. Unlike Wednesday, however, volume was extremely low. In other words, there were not the same number of buyers, whether shorts covering or bargain hunters buying. Thus the late recovery was more of a gratuitous move in continuation of the reversal that started Wednesday after NASDAQ and SOX undercut the 50 day MVA.
Large cap cyclical stocks with overall weaker leadership credentials, i.e., lower earnings and sales growth, continued to perform decently. We don't get too thrilled when they take the lead. The market is driven by earnings. Upside requires expanding earnings. The downside feeds off of contracting earnings as we saw in the long downtrend. Expectations about future earnings drive prices. There just is not that much upside in these stocks that have limited earnings and sales growth.
Friday the small caps were leading, and that is a good sign. After years of lagging, 2003 saw small caps emerge. As we noted in late 2002 and early 2003, economic recoveries are typically led by small caps that are able to pass gains to the bottom line faster than the large caps that are basically small governments with their bureaucracy, legal departments, personnel departments, committees, etc. Thus earnings start growing faster, and, all together now, earnings drive stock prices. The small caps are still leading, acting much better than the NASDAQ.
As we pondered last week, can the smaller caps lead the market higher without NASDAQ or SOX? After the late week action the SOX in particular is the bigger concern. The business environment is improving for chips. Indeed, they have been improving for some time as INTC, CY, XLNX, NSM and others have let slip for the past 6 months. Last week saw several companies up their guidance and expectations once again. Surveys of chip sales and demand show 20%+ growth in 2004. JPM said Friday morning that semiconductors were oversold and a buy. While they did surge Thursday on volume, Friday the momentum trailed off as semiconductors and the index itself moved up to resistance and sputtered. Many smaller chip stocks still look solid, but many in the SOX and other larger chips have rallied back after breaching support, approaching resistance on lower and lower trade. After some double tops prior to the initial fall, that is ominous action (e.g., INTC, AMD).
With NASDAQ and SOX struggling and the rotation into limited growth large cap cyclicals, the market has become a much more iffy proposition the past month as it continues to try and expand on an already long run. The action is much more volatile day to day with up sessions followed by immediate selling and vice versa. Fewer stocks are breaking out and rallying steadily while more start moves but cannot make significant headway. Others are just plain extended after long runs and they too are having trouble making further headway. Those are signs of the struggle to continue the move higher. They dictate caution in moving into positions. There are still those stocks that will breakout and run or those that are testing their breakouts and are starting back up. The smaller cap indexes harbor most of these. Then there are the large cap defensive stocks that have moved higher as money is parked in them as investors get a bit defensive in the indecision. The rest of the market, however, is showing indecisive action, and after a long run we are not getting aggressive at this stage.
Market Sentiment
VIX: 16.41; -0.32
VXN: 25.86; -0.29
VXO: 15.95; +0.09
Put/Call Ratio (CBOE): 0.75; +0.08
NASDAQ
Posted a modest gain but on low volume. Still holding the recapture of the 50 day MVA, but that is about all you can say for the session.
Stats: +6.68 points (+0.34%) to close at 1949
Volume: 1.462B (-19.43%). No volume at all as trade fell well below average. We note also that volume faded Thursday as the NASDAQ moved back over the 50 day MVA. NYSE volume rallied higher that session. NASDAQ is definitely struggling.
Up Volume: 856M (-714M)
Down Volume: 519M (+314M)
A/D and Hi/Lo: Advancers led 1.67 to 1. Modest breadth on the continuation of the Thursday move.
Previous Session: Advancers led 2.87 to 1
New Highs: 180 (+45)
New Lows: 14 (-10)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Made that higher low with the Wednesday reversal but stalled Friday at some resistance at 1950. The volume on the move higher is not enough to sustain a gain. There could be more light volume drift higher, but NASDAQ has to prove something to us at this point. It made a marginally higher high on the last bounce and sold off this month on some stronger volume. There was some distribution Wednesday to keep in mind even as the overall pattern is still decent. That pattern, however, is showing smaller and smaller bounces up the 50 day MVA; smaller in both the height and the length of the move. There are many attributes when put together indicate weakness building, but for now NASDAQ continues to drift higher, shaking off the last selling bout. It now needs semiconductors to get their act together, but they are even dicier right now than the overall tech index.
S&P 500/NYSE
Edged higher as it continued the Thursday stronger volume rally, but with no volume Friday it was coasting on the prior gain.
Stats: +2.93 points (+0.27%) to close at 1074.14
NYSE Volume: 1.208B (-15.51%). Volume fell off sharply after the Thursday action that saw some short covering along with buying.
Up Volume: 775M (-461M)
Down Volume: 420M (+235M)
A/D and Hi/Lo: Advancers led 1.92 to 1. Solid breadth after the spectacular Thursday session. Small caps have rejoined the gains, and they are fueling the breadth expansion.
Previous Session: Advancers led 3.12 to 1
New Highs: 343 (+80). SP500 and DJ30 hit new 52 week highs and the small and mid-cap indexes are bouncing solidly off the 50 day MVA, but new highs showed only a modest expansion. You want to see new highs over 450, even 500 as the smaller cap indexes start moving toward new highs as well.
New Lows: 11 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
New 52-week closing highs Thursday and Friday after making a higher low on the 18 day MVA (1061). After weeks of promise following the lateral summer consolidation the large cap index is finally putting together the kind of run the pattern suggested. The price/volume action this month has been positive, and there is more upside here toward 1100 where there are some prior price tops. That is minor resistance; the serious problems arise at 1050 to 1075 from the early 2002 double top. As seen with NASDAQ, those levels can exert influence from a distance. SP500 still has room to run, however, before they come into play.
DJ30
Stats: +34 points (+0.34%) to close at 10042.16
Volume: 177M versus 208M
A new 52 week high again as the blue chips posted a modest gain. It is moving higher but not peeling off big chunks of yardage. The slow, steady action is indicative of the overall slow advance in the market, and that is characteristic of a year end move on relatively light volume. DJ30 crossed 10K and held on the close, a psychological milestone. The next real resistance is at 10,260 from January 2002 and 10,353 from May 2002. That 10,350 level starts a thick layer of resistance up to 11,000 with intermediate milestones at 10,600. Thus there is still room to run up through year end, but then the blue chips will have to break through that resistance, and that will most likely take several attempts over a longer period.
THIS WEEK
The last full week of trade before the shortened Christmas week. The economic calendar is full and there are some key reports (CPI, housing starts, LEI, Philly Fed). Even with the economic data still coming strong the market is not surging on the news. We have discussed it many times before how the market anticipated all of this news starting in October 2002 and then rallied while no one believed the economy would improve. Indeed the move up through the summer was dismissed on that basis. Just over the past two or so months has the idea that the economy is really improving gained general acceptance, and lo and behold, with that recognition the market has started to struggle. The market looks to be in between the second and third phase of a recovery. The first is denial, the second is acceptance that there is some improvement, the third is the overall belief that everything is fine, and the fourth is euphoria, the 'things are different this time' stage. That has occurred time and again through history, most recently in the 'new economy' era of 1999. There truly is a new economy, but the old rules still apply. Same as in the 1920's. Same as in the 1950's with the UN ('there won't be any more wars').
That still means the market has plenty of upside, it just is going to find it harder to make headway until its next correction coming sometime in the next three months runs its course. It reaches these saturation stages where all of the good news is priced in, and it takes some consolidation and price reduction to set the stage for the next advance that will carry it further and price in the next round of economic gains. Much of the money has been put to work, and as we come to the year end, the game of chasing gains for the year is winding down. Thus some of the fuel for strong advances is gone and the market continues it trend but does so in a stumbling manner.
That puts us back to the basics, i.e., looking for stocks that are quality and have made nice pullbacks in their trends. We can pocket some gain on them between now and the end of January, but realize that when the overall market needs a correction we will be selling them. We shorten our targets with that in mind, still willing to participate in the moves but knowing that the market is extended and the gains just won't keep piling up until the clock is reset some with a consolidation.
So we look at the best opportunities with shorter term horizons. That includes the downside as well. During this period where the market is struggling, volatility is higher. Even if the market needs a correction it will still post nice upside gains after pullbacks. Stocks that are set up to fall further will rebound sharply as the market makes its up and down moves. We will be looking at short term downside plays as well for that reason as well as the fact that the market is still trending higher with the NASDAQ recovery over the 50 day MVA as it made yet another higher low.
Support and Resistance
NASDAQ: Closed at 1949.00
Resistance: Some price resistance at 1950. The March/August up trendline (1967). November high (1992), December high (2000). The January 2002 double top (2044 to 2099).
Support: The 18 day MVA (1939). The 50 day MVA (1917). 1875 to 1880 is the bottom of the November range.
S&P 500: Closed at 1074.14
Resistance: 1080 from February 2002 lows. The December to June upper channel line at 1087. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: November high (1061.40-1064). The 18 day MVA (1060). The exponential 50 day MVA (1049). 1030 to 1032 (early September highs).
Dow: Closed at 10,042.16
Resistance: 10,259 (January 2002 high). 10, 353 from May 2002 high.
Support: The November high (9903). The 10 and 18 day MVA (9927 and 9875). The October high (9850). The exponential 50 day MVA (9770).
Economic Calendar
12-15-03
NY Empire state index, December (8:30): 35.0 expected, 41.0 November
12-16-03
Consumer Price Index, November (8:30): 0.1% expected, 0.0% October.
Core CPI, November (8:30): 0.1% expected, 0.2% October.
Housing starts, November (8:30): 1.910M expected, 1.960M October.
Building permits, November (8:30): 1.900M expected, 1.973M October.
Current account, Q3 (8:30): -$136.1B exepcted, -$138.7B Q2
Industrial production, November (9:15): 0.5% expected, 0.2% October.
Capacity utilization, November, (9:15): 75.3% expected, 75.0% October.
12-18-03
Initial jobless claims (8:30): 360K expected, 378K prior.
Leading economic indicators, November, (10:00): 0.3% expected, 0.4% prior.
Philly Fed, December (12:00): 25.5 expected, 25.9 November
End part 1 of 2
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