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12/16/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: FDO; LNCR; AIR
Trailing stop alerts: None issued
Stop alerts: CDIC; OBAS
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Nasdaq busts 50 day MVA, rallies to retake that level as expiration week volatility hits.
- Consumer prices shrink, housing starts and industrial production surge.
- Same rotational pattern holds for cyclicals as techs, chips recover in afternoon session.
- Subscriber Questions
Expiration volatility out in force.
Stocks followed through to the downside early Tuesday, at least as far as technology and smaller caps were concerned; blue chips and other big cyclical stocks held up well during that selling, biding time. Nasdaq broke the 50 day MVA and the SOX was below support at 475 from the September and October highs. Eventually the selling subsided while the large caps hung on to positive territory. More position shuffling ahead of expiration Friday resulted in some covering and other buying, and the indexes rallied back in the afternoon session, Nasdaq reclaiming the 50 day MV while the small and mid-caps bounced off the 50 day without undercutting it. SOX recovered, but it still finished lower and could not get close to its 50 day MVA.
Good economic data was credited for the recovery, but frankly the market sold off after the data had been released not before. It looked much more like a rebound from the pretty hard selling Monday and early Tuesday with volume coming in slightly lower. While the defensive and cyclical stocks again enjoyed gains we would not call the rebound in Nasdaq and other techs a reversal that will necessarily lead to another run toward the top of the range. Instead it looks a lot like a rebound after selling in a typically volatile pre-expiration week when a lot of position shuffling takes place, particularly at year end when the indexes have performed well.
THE ECONOMY
Economic train continues.
Industrial production jumped in November to 0.9% beating the 0.5% expected and October's 0.2%. That is the strongest gain since 1989. Business equipment production jumped 1.7% versus a previous -2.9% drop. Generally production was up across the board. On top of that capacity utilization rose to 75.7% from 75.1 in October, beating expectations of 75.4. This is still not huge and we almost laughed at comments regarding concerns of bottle necks in the production facilities. It is similar to the mortgage situation: there is a lot of talk about rising rates, but historically they are incredibly low even after rising and thus housing is still very affordable. Everyone gets used to low rates, and when they show signs of firming there is breathless talk of high interest rates cutting off the economy at the pass. There is still plenty of room to grow in production before anyone feels constrained though much of that capacity is obsolete and will never be used again.
Consumer prices fall, core turns negative.
For the first time since 1982 core consumer prices came in negative (-0.1%). The overall inflation rate was -0.2% for November. Both were less than expected and you can argue the numbers bolster the Fed's continued caution regarding disinflation. Again the decrease is in products that we don't purchase on a daily basis, e.g., computers, autos, and other big ticket items. This is giving some a sense of false security we believe. We are not concerned about runaway inflation near term, but the seeds of inflation are being sown as demand continues to outpace supply. The supply side of the economy did not get the first tax cuts that perked up demand again as it flagged. The more recent tax cuts have helped, and now the businesses are production more as the production and capacity figures show, but they are still behind the curve. Inventories remain low for the holidays as consumers are buying more goods.
Again, that is a short term phenomena, and if the consumer slows a bit in 2004 as some suggest, production may catch up. With $100B of tax refunds coming as a result of the excess withholding due to the prior tax cuts the consumer is not going to be too bashful the first 4 months of the year, however. It is too early to tell if the rise in gold is actually showing inflation or just recovering from its own bout of disinflation, but with the Fed determined about its ability to keep interest rates low, any inflation that is starting to cook will most likely get baked into the cake if it is going to occur at all. Certainly we are all feeling the inflation of the goods we use on a consistent basis as demand has remained strong. As demand branches out into other areas that use some of the same materials, there is competition for those materials, and without ample supply prices will rise. That is why it is so important to continue supply side stimulus in this environment, not only because it works but because supply has to be freed up from regulation and added costs so it can put capital where it is needed in order to meet demand. Money flows to areas of need in a free market. Unfortunately, the Fed and federal regulation set up artificial barriers to that free flow of capital, and that creates the bottlenecks that spark inflation. In short, the feds cause that which they seek to avoid.
Housing starts soar.
Above we noted how interest rates are still historically low even though they are off their lows. Seems homebuilders are still seeing impressive demand even with rates ticking higher. November housing starts jumped 4.5% to 2.070M annualized units, much larger than expected and the largest increase since, all together, 1984. Building permits fell, coming in lower than expected, but we have seen that off and on for the past two years. Permits drop, starts rise, and talk is of decreased supply as a result. What happens is permits pop back up in a month or two. Sure the housing market is long in the tooth, but there is a new boom within a boom of late even as mortgage applications fall off. You continue to hear comments about the 'red hot' housing market, and that is always a concern. Again, however, they have been using that phrase to describe the sector for two years.
THE MARKET
An afternoon rally made Tuesday the mirror reflection of Monday when stocks gapped sharply higher then sold all session. Tuesday stocks sold early but then recovered in the afternoon. Volatility is alive and well this expiration week.
The same rotational pattern held as money moved from chips, techs and smaller caps into defensive cyclical stocks. DJ30 soared with the likes of CAT, UTX, MMM posting solid gains. The large cap indexes other than NASDAQ held up during the selling, and that helped the rest of the market find its feet for an afternoon rally. NASDAQ retook the 50 day MVA after breaching it intraday. That may set up a further bounce but NASDAQ and SOX are hardly out of the woods. NASDAQ did what it had to do to avoid collapse, but it has moved roughly laterally the past three months, unable to make the next move higher.
Once again there was good news from the smaller caps just as there was four sessions earlier, i.e., a jump off of the 50 day MVA. As with NASDAQ, however, the small and mid-cap indexes are spending more and more time in this rougher neighborhood. You can come out of it smelling like a rose, but the longer you hang there after a long run, the harder it is to get away without a consolidation or correction.
The action described is one of increased indecision or increased tension between buyers and sellers. The indexes are jumping back and forth in big moves, not smaller dribs and drabs. Part of that is options expiration week, part of that is the tug of war after a long run as investors want to keep their gains yet are fearful of losing them. So they rotate to the stodgy areas to 'park' for awhile. That continues the pressure on NASDAQ and the other leadership indexes (small, mid, SOX). Another factor to consider as we head into the Friday expiration is the large number of open interests in the SP futures and OEX options around the 1060, 1065, and 1070 strikes. As we saw last month, when there are large open interests in a narrow range, the indexes tend to gravitate toward that level. Thus the SP500 move to 1075 is getting outside of the range and we will most likely see it come back to close the week.
Market Sentiment
VIX: 15.93; -1.3
VXN: 26.15; -0.92
VXO: 15.7; -1.21
Put/Call Ratio (CBOE): 0.68; -0.02
NASDAQ
Broke the 50 day MVA and then rallied back to retake the level by the close.
Stats: +6.03 points (+0.31%) to close at 1924.29
Volume: 1.822B (-0.52%). Volume faded slightly as the index rebounded after testing lower. That is not the action you want to see. You want to see volume jump as the index rallies back after a breach of support as that shows buyers swarming in. Tuesday did not show the same surge in volume on the upside move as the selling did on the late dump Monday, an indication that the sellers still have a bit more strength.
Up Volume: 963M (+566M)
Down Volume: 845M (-556M). Note how the price action was the opposite of Monday (sell then rally versus rally then sell), but the volume is evenly matched. Monday downside volume crushed upside volume 1.4B to 397M. There is a saying we have: greed is powerful, but fear is the master.
A/D and Hi/Lo: Decliners led 1.04 to 1. Decliners managed to lead on an upside close. Decliners crushed advancers Monday. Similar to the up/down volume, this shows the strength has been on the sell side.
Previous Session: Decliners led 2.38 to 1
New Highs: 86 (-171)
New Lows: 15 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ blew through the 50 day MVA (1917) during the morning session but then managed a rebound to recapture and hold that key level on the close. This is extremely volatile, whipsaw action NASDAQ is showing as it continues its more or less lateral move this quarter. Volatility has not been a stranger during that move, but it has been a site to behold of late: -40.53 Tuesday, then a doji Wednesday and +37.67 Thursday. Monday -30.74. This increased volatility is part of the expiration week but also part of the faltering steps below 2000 and the end of the year that has seen strong NASDAQ gains. Hesitant to push new positions, hesitant to hold onto existing positions.
The recovery kept NASDAQ in position to make a higher low, and it could bounce yet again. However, we also suspect it will trade along with SP500, and we anticipate SP500 will not go much further upside before gravity pulls it back toward those high open interest strikes.
S&P 500/NYSE
Held the 10 day MVA and rallied solidly on to post a new 52-week closing high though volume backed off slightly.
Stats: +7.09 points (+0.66%) to close at 1075.13
NYSE Volume: 1.501B (-1.33%). Volume remained above average but was slightly lower, giving the move less credibility. No doubt, however, that buyers were moving into the large cap cyclical stocks once again.
Up Volume: 926M (+410M)
Down Volume: 557M (-371M). Much more evenly matched Monday to Tuesday as opposed to NASDAQ.
A/D and Hi/Lo: Advancers led 1.43 to 1
Previous Session: Decliners led 1.58 to 1. Roughly even with the Monday decline.
New Highs: 196 (-239). As one subscriber pointed out, even with solid new highs Monday, the differential versus earlier in the rally was substantial, indicating the more recent move was not as strong. Not conclusive buy itself, but shows the weakening condition of the market as it tries to extend its gains. It is another factor demonstrating the move is on weaker legs.
New Lows: 7 (-3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Large caps held the 10 day MVA (1067) after the Monday test of that area, then surged higher late. On the close they were right back at 1075 though managed a higher close. A good recovery after a higher volume reversal session Monday looked ugly. Again the index is just below resistance at 1280 from prior price lows and the upper channel line on this uptrend. It is setting up for another breakout attempt, but the high level of open interest in 1060 to 1070 strike options is a drag on a further move. It will take strong volume to make the breakout work
DJ30
Stats: +106.74 points (+1.06%) to close at 10129.56
Volume: 233 million versus 247 million.
Surged to a new 52 week closing high on above average though lower volume. DJ30 has easily cleared 10,000 and is now on the way to next resistance at 10,259 and 10353, both just a couple of big moves away. Santa Clause has come to the stock market, but it has come to the large blue chips.
WEDNESDAY
The prognosis is for continued volatility ahead of the Friday expiration as the indexes continue to move at a different pace. Over the summer NASDAQ and the smaller caps rallied while the SP500 and DJ30 moved laterally. The horses have changed for now, but whether it is a sea change or a year end phase remains to be seen. Each year the 'January effect' affects stocks earlier. With the small caps rallying well ever since March, the January effect may be the need for a nice consolidation.
Once again the indexes have set up for a bounce with NASDAQ, SP400, SP500 showing dojis over the 50 day MVA. SOX showed a doji as well and may try a bounce after recovering from a breach of price support at 475. We don't think a bounce will be sustainable, however, on NASDAQ and SOX. Indeed, a bounce up toward 490 to 500 on SOX will most likely be the next shorting point.
Support and Resistance
NASDAQ: Closed at 1924.29
Resistance: The 18 day MVA (1936). Some price resistance at 1950. The March/August up trendline (1975). November high (1992), December high (2000). The January 2002 double top (2044 to 2099).
Support: The 50 day MVA (1917). 1875 to 1880 is the bottom of the November range.
S&P 500: Closed at 1075.13
Resistance: 1080 from February 2002 lows. The December to June upper channel line at 1084. 1100 represents some early 2001 lows. 1150 to 1175, the early 2002 double top.
Support: November high (1061.40-1064). The 18 day MVA (1063). The exponential 50 day MVA (1049). 1030 to 1032 (early September highs).
Dow: Closed at 10,129.56
Resistance: 10,259 (January 2002 high). 10, 353 from May 2002 high.
Support: The November high (9903). The 10 and 18 day MVA (9978 and 9916). The October high (9850). The exponential 50 day MVA (9776).
Economic Calendar
12-15-03
NY Empire state index, December (8:30): 37.4 actual 35.0 expected, 41.14 November (revised from 41.0).
12-16-03
Consumer Price Index, November (8:30): -0.2% actual, 0.1% expected, 0.0% October.
Core CPI, November (8:30): -0.1% actual, 0.1% expected, 0.2% October.
Housing starts, November (8:30): +4.5% (2.070M actua), 1.914M expected, 1.980M October (revised from 1.960M).
Building permits, November (8:30): 1.874M actual, 1.901M expected, 1.973M October.
Current account, Q3 (8:30): -$135.0B actual, -$136.0B expected, -$139.4B Q2 (revised from )
Industrial production, November (9:15): 0.9% actual, 0.5% expected, 0.4% October (revised from 0.2%).
Capacity utilization, November, (9:15): 75.7% actual, 75.4% expected, 75.1% October (revised from 75.0%).
12-18-03
Initial jobless claims (8:30): 365K expected, 378K prior.
Leading economic indicators, November, (10:00): 0.3% expected, 0.4% prior.
Philly Fed, December (12:00): 25.0 expected, 25.9 November
SUBSCRIBER QUESTIONS
Q: Great Newsletter. I am learning a lot from you and appreciate the education. In an effort to be a better investor I am learning to follow the market volume and breadth. I often check the volume numbers of the Dow and Nasdaq throughout the day especially the last 10 minutes of the day. Many times the volume will seem very low 1.2 million range. However, when I read your newsletter that night the volume for the day will have finished in the 1.8 to 2 million range. Where can I find accurate volume numbers or does the volume in the last half hour usually represent 1/4 of the day's volume?
A: In the last half hour of trading, if you see volume ramping up you can bet that it will come in around 100 million or so more on the Nasdaq by the close. As for what percentage of volume the last half hour represents, that can vary widely depending upon the stock, the index, the move being made that day. You can generally bet that the first hour and last hour see the bulk of the volume barring extraordinary intraday events. You should know that on the strong, breakaway moves, you will typically see tremendous volume early in the session. In other words, it will be easy to see a stock is making the move on requisite volume. Now there are always situations where volume builds slowly and steadily, so we never write off a stock that is not showing extraordinary volume early; there are 'sleepers' that are steady movers and then in the last half hour all of the sudden have the volume we are looking for.
When looking at intraday volumes, we will use that in conjunction with our real-time charting service which also provides us a unit by unit (we use 5 minute intervals) volume count. That way we can keep abreast of the action real time as a stock or index moves up or down. In that way we can tell if volume is surging or not on the move. eSignal is a good method to view this interval volume movement as well as the running total on a particular stock, ETF, etc.
For keeping up with intraday volume on the web, Yahoo.com (www.finance.yahoo.com) is fairly good; it is pretty accurate, but there is often such a surge in the last half hour that it gets behind. Yahoo Finance can be used to track intraday volume as well as up volume and down volume. It is not real time, but they update the information at least every 20 minutes and that is not bad. That gives you an idea of the strength of any move. This does not give you a comparison with the previous days' volume. To do that we use our charting tool and compare from there. Another place for real time snapshots of prices and volumes is www.freerealtime.com. You register free and then you can look at real-time snapshots of price and volume. There are other sites where you can get a free trial for real time data, such as www.dtn.com.
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 3
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