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understanding the stock market, top stock pick
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12/27/03 Investment House Alerts Report
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IH Alert Subscribers:
Christmas Week 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 Wednesday and Friday: TRPH; AIR; NOVL
Buy alerts issued: IMOS; INAP; MTZ; OSTK; PTNR; AMZN
Trailing stops issued: None issued
Stop alerts issued: None issued
MARKET SUMMARY
Friday it was the small caps' turn.
Wednesday NASDAQ took the lead from the SP500 and DJ30 as those two indexes, winded from their market-leading sprint, took a breather. After one day, NASDAQ turned the reins over to the small caps and they led the move in Friday's half session. No breakout from the smaller issues, just recapturing some of the Wednesday losses as they test the early December high. Steel and basic material stocks were the best movers as a group while most stocks continued to move modestly, either higher in their trend, in the same consolidation range, or struggling below resistance.
The session started out well with a solid surge in the first hour. Not bad given the increased speculation about a terror attack (flights in France cancelled) and the expanded quarantine related to mad cow (herd of sick cow isolated). SP500 tapped at near resistance (1100) at that point, however, and the move stalled. A nice lateral consolidation ensued and it looked as if the market was setting up to break higher toward the close. Instead, the sellers entered and carved away some of the gains for the session, locking in some of the good moves ahead of a 2.5 day weekend. The indexes still finished positive, keeping the gains for the week.
THE ECONOMY
November durable goods orders slump 3.1%.
The largest decline since September 2002 was a 4 point swing from the 1% gain expected. It also gutted much of the nice October 4% gain (revised upward from 3.4%). Overall the trend in durables remains positive, and this is a very, very volatile number. Still it does cast some shadow on the strength and speed of the recovery in business spending, the key element of the recovery at this stage. Indeed, capital goods orders excluding defense and aircraft fell 5.9% after gains of 6% and 1.5% in September and October.
November saw a definite pause in the investment surge, but let's put some perspective on that one number. Capital spending has surged without question. It is giving a lot of boost to the economy, and while many point to the consumer as the key for the 8.2% Q3 GDP, those many would be wrong. The consumer has been consuming all along; the business side had gone dormant and needed reviving. The surge in business investment in Q3 was the key role in that number. It has been the key factor in the economic recovery. It as triggered by tax incentives to small businesses. There are a lot of small businesses that are driving new trucks and vans thanks to the $100K expensing provision in the tax cut package. New tools and equipment purchases have surged as well. October was a huge month for those purchases; November was a breather. You can bet that December has seen a substantial increase in these purchases as small businesses buy to take advantage of the expensing provision before the year end; that way they can take advantage of it again in 2004. Thus we are not overly alarmed about the November decline.
Retailers remain glum about holiday sales.
Sales improved in the last weekend and days before Christmas as shoppers jumped into the car and shopped after weather kept many in the Midwest and Northeast from shopping earlier. Most complained it was not enough, however, to give them the blowout they were looking for. Wal-Mart saw a surge but still said sales would be at the low end of plan. Target said late in the week that it was going to miss its plan. Yet, many specialty retailers (HOTT, GPS) are showing strong sales. Those that were left out in the cold in recession years (e.g., JWN, NMGA, TIF, etc.), however, reported strong sales. Online retailers posted record sales again with some huge percentage increases. Online sales, however, is not an appreciable part of the overall retail picture yet, and when the largest retailer is at the low end of plan, that had the retail analysts grousing as they did when the recession started and the old line department stores lost large percentages of sales to WMT, TGT and the other discounters.
So should we be working on new furrows in the brow over these retail sales? Survey after survey of shoppers (not our surveys alone) indicated that consumers were ready and willing to spend more money this holiday season. They were willing to put out more money for a gift this year. What the retailers found, however, was that without the big discounts consumers were not buying extra gifts or what has turned out to be key, gifts for themselves. In other words they stuck to their list and did not do the good old 'one for you and one for me' form of shopping. Thus a big chunk of sales over the past two years was diminished this year.
Is that a lack of willingness to consume or more of a response to marketing? Remember, inventories were lower heading into Christmas. When you look at the bare shelves in many stores that we saw in film clips from across the country, it is easy to see that there were shortages in certain products while others such as clothing saw excess after strong sales to start the fall. Post-Christmas sales finally showed some major discounts in apparel, but not many other areas. Of course, apparel fire sales are common after each season, with massive discounts last seen in July as the summer styles were moved out. In any event, it appears that retailers are finding themselves in the same position as auto makers: consumers addicted to incentives. There is a certain base need, but beyond that consumers need inducement to buy a replacement when what they have is adequate. With low inventories, however, retailers were disinclined to cut prices, betting that they could make their sales closer to retail price. It did not work out for all.
That does not mean, however, that we should be fretting about the holiday sales, unless, of course, you are a retailer that did not make its plan. If consumers are willing to spend (and the steady increase in wages the past 3 months backs that up), then we don't have to worry about a consumer going dormant. Holiday sales were solid with the per sale dollar amount well above the prior two years. With more tax refunds coming in Q1 as a result of excess withholding we can look forward to continued consumer retail strength to again pick up the pace when the year end jump in business spending slacks off after year end buying to take advantage of 2003 tax incentives.
THE MARKET
No real change in the market, but none was really expected. SP500 and DJ30 posted modest gains, but they have turned flat the past three sessions after strong moves higher. NASDAQ continues a very nice 3 month lateral consolidation similar to what SP500 and DJ30 put together during the summer that ultimately set the foundation for the current breakout and run. NASDAQ looks to be preparing for the next rally, building its foundation as well. The small caps took the lead Friday, but there was no breakout there either; they are at the early December high, looking a lot like NASDAQ in early December. In short, the large caps are extended and need that pullback to take a breather, techs are still trying to form up, and the small caps are at an inflection point: they rally from here or fall back in the range and start a NASDAQ-like lateral move. With Thursday being a holiday, there may not be many answers this week as to what direction the indexes are heading near term.
Market Sentiment
VIX: 17.45; +0.79
VXN: 24.01; +0.67
VXO: 16.47; +0.35
Put/Call Ratio (CBOE): 0.57; -0.16
NASDAQ
Modest gain, falling back from intraday high as it continues its lateral consolidation.
Stats: +3.91 points (+0.2%) to close at 1973.14
Volume: 531.172M (-60.02%)
Up Volume: 322M (-601M)
Down Volume: 198M (-184M)
A/D and Hi/Lo: Advancers led 1.46 to 1
Previous Session: Advancers led 1.84 to 1
New Highs: 121 (-69)
New Lows: 4 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
No real movement as NASDAQ continued its 2.5 month lateral consolidation much the same as DJ30 and SP500 did June through August. NASDAQ is forming somewhat of an ascending triangle, using the 50 day MVA (1927) as the rising low with roughly 2000 as the top. As noted Tuesday, that makes the breakout for NASDAQ over 2000. Then it has some room to move up to the early 2002 double tops at 2048 to 2100. From there the NASDAQ faces a real test as that level also represents a consolidation range from April to August 2001. That range ultimately failed, so it represents overhead supply that will weigh on NASDAQ when it moves up to meet that level. As we noted months back, that will be the first real test of the move from April 2003. Perhaps NASDAQ will consolidate quite some time here and then breakout sharply and rally through that point. That is a long shot. For now it is working off the gains for the year, holding the solid move as it does, and that is a sign of some strength.
S&P 500/NYSE
Stalled out at 1100 for the third session, indicating the need for a breather here.
Stats: +1.85 points (+0.17%) to close at 1095.89
NYSE Volume: 353.771M (-68.99%)
Up Volume: 241M (-465M)
Down Volume: 108M (-315M)
A/D and Hi/Lo: Advancers led 1.83 to 1. Advancing issues improved as the small caps took the lead.
Previous Session: Advancers led 1.71 to 1
New Highs: 333 (-128)
New Lows: 10 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large cap index is sustaining headwinds at the 1100 to 1106 level. There are several peaks and valleys culminating around 1100 over the past three years, and they are working to stall SP500. Nothing major at this juncture. Indeed, the bigger problem is the 1150 to 1175 early 2002 double tops. For now the large caps are stalling some at near resistance (1100), but they are in the midst of a solid breakout from the prior week. They need a pullback to regroup and catch their breath after the strong breakout, but they are not showing signs of fatigue. Again, if NASDAQ can complete its consolidation and the large cap cyclical stocks hold their own as well, then there could be an 'orderly' switch back to the growth stocks after the first of the year.
DJ30
Stats: +19.48 points (+0.19%) to close at 10324.67
Volume: 49.5 million versus 86 million
Managed to hold a slight gain to the close as it sold off late following the Thursday pullback. DJ30 has enjoyed an excellent surge off of the 50 day MVA (9901) as it broke out in early December. A pullback to the 10 day MVA (10,221), even the 18 day MVA (10,120), would not be out of the ordinary after such a move. As noted Tuesday, it may take next week or even after January 1 to really pull back to take a bit of froth out. It has slowed at 10,353 resistance (May 2002 highs), ready to take a breather. The real problem is at the multiyear level of overhead supply at 10,500 to 10,600. IBM and HPQ are still forming up well, forming handles to their bases. If they can join the move DJ30 would really rocket higher.
THIS WEEK
The week ended with the former leading indexes taking the pace, NASDAQ Wednesday and the small caps out front Friday. This week is most likely going to show more light volume with New Years on Thursday and many fund managers out until after the first. That means when a few sellers or buyers get together the indices will fall or rise similar to what we saw late Friday.
That makes it harder to gauge the overall market moves, but if the trends continue to hold, that is a good measure of how they will perform when the volume returns. It would be a perfect week for DJ30 and SP500 to make pullbacks to near support to consolidate the nice breakout moves. It would be a great week for NASDAQ to continue its consolidation as well. The SP400 (mid-cap) and SP600 (smallcap) have matched their early December highs, looking as if they want to fall back some. As noted earlier, they are showing signs of stalling at this level and that puts them in very similar circumstances to NASDAQ just a few weeks back. In other words they could pull back, make a higher low, all the while building a nice consolidation for the next move up after the first of the year.
We have been playing the corners, looking for the stocks that are set up to move and then moving in when they show the strong volume breaks. There are several such patterns spanning the various sectors and capitalizations including IBM, TXN noted earlier. In these light volume weeks we just look for those stocks that are set up well and are attracting buyside volume as we position ourselves for the next move higher.
Support and Resistance
NASDAQ: Closed at 1973.14
Resistance: The March/August up trendline (1985). November high (1992), December high (2000). The January 2002 double top (2044 to 2099).
Support: The 18 day MVA (1949). The 50 day MVA (1927). 1875 to 1880 is the bottom of the November range.
S&P 500: Closed at 1095.89
Resistance: 1100 represents some early 2001 lows and 1106 from a May 2002 top. Minor resistance at 1115. 1150 to 1175, the early 2002 double top.
Support: The December to June upper channel line at 1085. 1080 from February 2002 lows. The 10 day MVA and the 18 day MVA (1086, 1078). November high (1061.40-1064).
Dow: Closed at 10,324.67
Resistance: 10,353 from May 2002 high. 10,600 (March 2002 peak).
Support: 10,259 (January 2002 high). The 10 and 18 day MVA (10,221 and 10,120). The November high (9903). The exponential 50 day MVA (9901). The October high (9850).
Economic Calendar
12-30-03
Chicago PMI, December (10:00): 62.0 expected, 64.1 November.
Consumer confidence, December (10:00): 91.0 expected, 91.7 November.
Existing home sales, November (10:00): 6.34M expected, 6.35M October.
12-31-03
Initial jobless claims (8:30): 350K expected, 353K prior.
End part 1 of 2
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understanding the stock market
top stock pick
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