world stock market, us stock market

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12/20/03 Technical Traders Report
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Technical Traders Report Subscribers:

Holiday Schedule:

Monday: Report will issue as usual.
Tuesday: Market summary and continuing play tables given shortened Wednesday session.
Wednesday: Half day session. No reports.
Thursday: Christmas
Friday: Half day session. Market summary, note best plays, stock summary tables.
Alerts will issue as usual.

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MARKET ALERTS
Targets hit alerts issued Friday: None issued. Letting stocks such as CPHD, EMBT; GBN
Buy alerts issued: TEK
Trailing stops issued: None issued
Stop alerts issued: None issued

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/alertttr.htm

SUMMARY:
- Indexes take a breather as semiconductors try to hang on at the 50 day MVA.
- Big week ahead for the consumer while business spending surges.
- Holiday rally was in force as old economy surged, techs refused to cave.
- Subscriber Questions

Expiration volatility returns, but market returns to flat by the close.

Friday stocks showed a lot of movement, but by the end of the day closed basically flat. Volume expanded, but that is typical for an expiration Friday. With the indexes showing little movement and mostly holding up after logging gains earlier in the week, it was not a distribution session. It wasn't a strong session, but after DJ30 and SP500 posted nice gains they were due for a breather.

The bigger issue is whether they will continue the gains this week or settle in for some more profit taking ahead of year end. DJ30 and SP500 are on a roll, and after a bit more testing lower to start off the trend of least resistance ahead of Christmas is up. Nasdaq and SOX are more problematical. Nasdaq held up fine Friday, coming off of a 10 day MVA test to cut its losses and hold the uptrend. It has a lower high (bad) and a higher low (good) the past two weeks. SOX rallied sharply Thursday and then hesitated Friday, clinging to the 50 day MVA. Thursday's action looks suspiciously like position covering ahead of expiration. The chips are still in a precarious position. If they don't contribute NASDAQ has problems.

THE ECONOMY

Make or break holiday sales week is here.

Our surveys continue to show overall strong sales at stores though we have received some reports that Midwest stores were slower last week. We also had many reports that consumers were buying online when they could not make it to the mall due to the weather. Many malls report full lots with patrons making their own parking lot extensions on the side streets and green areas.

Even with some aggressive shopping, this week is the key week. Last year retailers and analysts were singing the blues all season long and most everyone thought it would be a disaster. Again we were conducting our own surveys and found that, while it was not going to be strong, it was not going to be horrible. That last week saw 40% of overall sales come in. Thus, this coming week will be critical to the retailers and the 'success' of the holiday season. We have a feeling there is a great underestimation of the online sales and the number and amount of gift card giving, something that came on the scene last year and has only increased in popularity this year.

Supply catches up with demand, helping the inflation outlook.

Last week we discussed the problems facing the economy including the inflation potential. Despite low PPI and CPI numbers, prices in key areas are rising and hurting the consumer. That eats into the discretionary spending, slowing consumption. The money is still spent, just on core items. The economy needs that extra spending to 'lift all boats' as the saying goes.

Some new data indicates that the consumer has slipped a bit as more funds are diverted to essentials including some rising energy prices to heat homes. It also creeps into other areas as Friday a major airline announced it was adding a $3 surcharge to each leg of flights. This is not an uncommon practice. Remember when prices jumped up in late 2000 when OPEC and the Clinton administration engaged in a staged dispute over oil prices? Prices jumped and you started seeing energy 'surcharges' on you extermination bill, etc. Small, but they add up over the entire economy on top of already higher energy prices for what you use yourself.

While it is not good to see the consumer slip, the consumer has not flown south for the winter. Some data suggest that they have slowed to 2.1% in Q4 versus a 6.6% increase in Q3. At the same time industrial production has surged over three times the retail sales growth in Q4 (+7.8% production surge). Why is this good news even though the consumer has pulled back some? One of the problems with the recovery has been the threat that overheated demand was outstripping supply. That means more dollars chasing too few goods. That is the recipe for inflation. Throw in foreigners selling out of dollar-based investments and sending those dollars home, and you have even more inflationary pressure. With production finally surging with the stimulus the tax cuts have provided, supply is rising faster than demand, and that helps splash some water on the inflationary heat.

That production is great, and it is not only in consumer areas but showing up strong in the business side as well, the missing ingredient in the recovery that was not a recovery until the stock market bottomed in October 2002 and forecast the economic turn in 2003. Computer and office equipment jumped 32.6%. Computers, communication equipment, and semiconductor production (the 'high tech index') shot up an annualized 50.7%. The spending increases are major, albeit starting from low levels. It is the rate of change, however, that is the key, and production is now surging. That is how a free economy works: money flows to where it is needed as long as there is no regulatory restriction that creates the imbalances that cause inflation. We have advocated since 1998 that if the Fed would have just stayed out of the way (we were writing this even before the rate hikes started) the market would do a fine job of allocating funds where they were needed. Instead the Fed raised rates, dried up the money supply, and created the very imbalances it said it was protecting us from. It took some hefty tax incentives and basically free money to get businesses to spend once more. It is finally paying off, and the lull in consumer spending is helping reduce some inflationary pressures.

The year ahead: spending and energy prices are the big threats.

Terrorism springs to mind for a lot of people when looking ahead. We heard Howard Dean say we are no safer today than we were when the 'planes hit the towers'. You would think a terror attack would then be the gravest threat to the economy and market, and that another catastrophic attack here in the US would be imminent and inevitable. Though an attack could happen anywhere at any time, in reality that statement is at least reckless. Before 9-11 the terrorists had a whole wide open country to train in and plan their attacks and develop their weapons. They had unfettered training and intelligence relations with other countries. Now the terrorists have no home base, are harried at all points, are focused on fighting us in Iraq, have their money supply under pressure ($8 million in hashish seized in the latest capture), and, much like Hussein, are hiding underground. While there are still problems in our own security at home, substantive and effective measures are and have been implemented. It is a learn as you go process, but we are better off. We are running mock drills (one was just completed Friday) and uncovering our weaknesses. The Dean statement was a total emotional ploy. As I learned in law, if you have bad facts argue the law. If you have bad facts and bad law, make the emotional appeal. It almost never wins the day, but at least you can make the argument and bill your client with a lawyer's good conscience. That reminds me. You know why sharks don't bite lawyers? Professional courtesy. In any event, the COST of the fight on terror is the element that will most certainly impact the year, not an attack itself, at least in terms of probabilities.

Oil is a problem.

The big threats we see are energy prices and federal spending. After falling into the low twenties after it was clear an easy victory in Iraq was in hand, oil prices have surged back up to pre-war levels, rising over $33/bbl last week. The misjudgment regarding the near aftermath of the war led to gross overestimation of the ability to ramp up Iraq oil production. When that was clear, prices started rising. On top of that there is China's booming economy that is soaking up one-third of the world energy demand. Nothing like competition on the demand side to keep prices rising.

Oil prices are up over $10 in 2003. They are again reaching levels where, if sustained (6 months or more), there is a significant adverse impact on consumer and business spending. Again, more discretionary funds have to be shifted to pay for higher energy costs. Ah the lack of an energy plan in the US again comes up to hurt us. For eight years the Clinton administration completely ignored energy problems. In the last six months there was that OPEC spat, but with a lame duck administration you knew nothing would come of it. With the refusal to open less than 1% of ANWR for the purpose of exploring for oil, with lawsuits attempting to block oil exploration in the National Petroleum Reserve in Alaska, a huge parcel of land set aside exactly for oil production, the US has little hope of adding to domestic reserves. Yes they would not divert major dependence from foreign oil, but it provides some buffer. You don't discourage fifty year olds from starting to save for retirement simply because they won't have enough to support themselves when they retire. Again, every little bit helps solve the problem. With modern exploration and drilling techniques, the awful pictures of Prudhoe Bay from the 1970's development will not occur again. You have to pass a course on the environment before you can even get shipped to Alaska.

Thus one priority of the administration is to get Iraq production back up to over 1.5 million barrels and then engage in production activities to unlock other known massive reserves in the country. Many of the current fields are severely damaged by improper production methods/reservoir maintenance, and have to be replaced with new fields. They are know fields; it is just a matter of drilling, getting production facilities up, and then getting it out. Gee, just a walk in the park. The administration sorely misjudged the effort it would take with respect to the condition of the facilities and fields as well as the post-war resistance throwing roadblocks down at every turn.

Spending away the golden goose.

There is no problem with spending during a recession to get the economy back on track though supply side tax cuts work better. No problem with spending what is necessary to protect us here at home either. They go hand in hand: you have to have an economy that can produce the war materials needed, and you have to be able to protect the homeland so it can produce what is needed. Common sense.

But we have gone way beyond that. Bush has yet to cut one program, veto one spending bill (Reagan had vetoed 23 by this time in his presidency). If you want it, you get it. Or just tack it onto another bill and it will be passed. Heck, the 2002 budget was voted on when Congress had only an hour or two to review the several thousand page document. As senator Kyle from Arizona noted, it was the height of irresponsibility to vote on a bill when you had no idea what all was in it.

Now we have another $400B in the prescription drug program. As we know, once an entitlement is established it is beyond scrutiny and will continue to suck up more and more money as it is expanded well beyond its original scope. Social security is a classic example. It was created when the average lifespan was 62; you had to beat the average by three years to start collecting. It used to be a stipend; now it is a subsistence level entitlement it was never intended to be. Almost anyone can make a claim for it; I know of children who have never set foot in the US but whose parent moved overseas and contributed only for a couple of years. When the parent died they filed for and received fat social security payments in US dollars. There are way too may straws sucking on the 'trust fund.' Just another example of a program that had good intentions but is out of control with fraud and bureaucratic largesse. When times are good we create programs we cannot possibly pay for when times inevitably turn sour.

What this does is drain important capital from the economy when times are good. When times are bad typically taxes are raised to pay for this 'nondiscretionary spending (i.e., a program no politician has the guts to face and make hard decisions on). That is a double disaster for the economy: it lost important funds to keep the economic ball rolling, and when it needs the money the most, taxes are raised taking more money out of the economy and reducing the incentive for entrepreneurs to take risks to create new businesses.

Thus, these new programs and unbridled spending for the Rock and Roll Hall of Fame, Cowgirl Hall of Fame, Grammy Foundation, and thousands of narrow, self-interest projects will work to sap the recovery and keep the deficit at huge levels. The federal government has so overstepped its constitutional powers that it has turned the expressly stated principle of a limited central government with enumerated powers to an all-powerful monster that trumps state rights at every step. The relationship between the federal government and the states has been turned completely around, and we all bear tremendous additional cost in the form of federal mandates as opposed to local state decisions about what is best for the people of the state. With the explosion in spending, Bush and Congress (republicans and democrats) are shooting the recovery in both feet just as it gets started running.

THE MARKET

Friday saw little change in the overall action. The large cap indexes surged all week as money rotated out of NASDAQ and smaller caps that had logged strong gains and led the market up through October. Money has not left the market for the most part, just shifting around to other areas that had not rallied as much. NASDAQ has virtually stalled at 1950 to 2000 since mid-October. SOX has become downright worrisome as it continues to below the 50 day MVA and many chip stocks are in corrections and threatening further downside.

One good thing about the Dow and SP500 taking over some leadership is that it allows the leading tech and small caps to form new, much-needed bases to set up the next moves. The market is not going to go far on the back of stocks with slow earnings and sales growth, but they make a good short term place to park money while the leaders correct. Again, that rotation is good for the market as it shows money is not ready to leave and is still seeking opportunity.

Problems arise when the Dow and other non-growth stocks take the prolonged lead, meaning that NASDAQ lags for a long period. In the market's past history this has led to declines. In 1986 DJ30 outperformed the market and that folded into 1987 that ultimately led to Black Monday. That is something to keep in mind, but if the leaders on NASDAQ and the smaller cap indexes (e.g., TSCO, NFLX, SINA, MXIM) form good bases over the next several weeks and then move up and breakout, you cannot ask for better market action.

Market Sentiment

VIX: 16.42; +0.26
VXN: 24.89; +0.36
VXO: 16.05; -0.20

Put/Call Ratio (CBOE): 0.8; +0.15. Jumped rather sharply on a basically flat session. Still, it was expiration so there were positions on both sides of the market being adjusted.

NASDAQ

Gapped higher, sold to the 18 day MVA but then managed to cut the losses as volume surged. Still made that higher low.

Stats: -5.16 points (-0.26%) to close at 1951.02
Volume: 1.888B (+9.51%). Strongest volume of the week, coming in above average but still well off of the highs for the month. Not really distribution as it was expiration Friday and NASDAQ managed to cut two-thirds of its losses on the session by the close.

Up Volume: 845M (-587M)
Down Volume: 993M (+719M)

A/D and Hi/Lo: Decliners led 1.13 to 1
Previous Session: Advancers led 2.11 to 1

New Highs: 171 (+40)
New Lows: 11 (-6)

The Chart: http://www.investmenthouse.com/cd/^ixq.html

The past two weeks saw NASDAQ make a lower high but then a higher low right on its heels. The Thursday surge gave NASDAQ a leg up on that lower high from the previous week. That action continues the uptrend, but as noted earlier in the week, the rate of ascent has slowed as NASDAQ has basically moved laterally for 2 months. The primary uptrend has broken and NASDAQ made the most serious test of the uptrend since it started in March. It could provide a rise into Christmas, but it is already showing the signs of correcting or at least consolidating as many leaders have fallen and are starting new bases. It needs the correction, and we would just prefer it to take it here in a mild form while the large caps outperform, setting up a good point to rally in the first quarter of 2004.

End part 1 of 3

world stock market
us stock market