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us stock market, understanding the stock market
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1/03/04 Investment House Daily
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Investment House Daily Subscribers:
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MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: CYD (bonus); ALTI; CHU (bonus); JMAR (bonus)
Trailing stop alerts: IDT
Stop alerts: LCAV
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:
- Inauspicious start to the year as market fritters away a nice gain.
- National manufacturing index knocks it out of the park.
- Real story starts this week as indexes are set for a pullback.
- Subscriber Questions
Stocks trade away gains, mark time ahead of next week.
Futures were solid, rising on some optimism that the cancelled flights and added security measures helped deter any terrorist activities, or perhaps there were not any attacks planned at all. Stocks opened solidly higher and then spurted on an excellent national manufacturing report. They moved laterally, set up another run to the close, and then the bottom dropped. NASDAQ and SP600 were leading the way with close to 1% gains, but the banking stocks and housing stocks rolled over, starting an afternoon decline that dragged all stocks negative. A small bounce pushed NASDAQ and the small caps positive but the action was clear. Clear indecision, that is. Buyers tried to push it higher and sellers moved in to close out some positions ahead of the real action next week.
THE ECONOMY
December ISM explodes higher.
National manufacturing, already expanding for 6 months in a row, threw water on the idea that the economy is in a major slowdown after Q3. There won't be another 8.2% GDP gain, but growth will be strong and above the 4% expected as the lagging manufacturing sector contributes more and more to the recovery. It is the latest to join in on the business side, the missing ingredient to the economic recovery up until 2003.
The ISM jumped to 66.2 from 62.8 (61.0 expected). That was the fasted gain in, all together now, 20 years. New orders hit 77.6 versus 73.3; that was the highest level since an 80.3 reading in . . . July 1950. Man, that was a hey day for manufacturing back then. The employment index hit 55.5, up from 51.0 and the second straight 50-plus month, indicating an expanding manufacturing employment sector after years (yes it has been that long) of decline. Inventories fell to 47.3 from 50.0. While some viewed this as a negative (it will detract from Q4 GDP), it is actually a longer term positive: a lot of shelves over the holidays were getting bare as inventories scraped lower. That means manufacturing will continue to pick up speed as the stock to sales ratio is, dare we say it, dangerously low. Okay, no orange alert or anything like that, but the ISM number and the other sub-indexes (e.g., new orders) show that there is going to be even more activity as inventories are rebuilt in Q1 and Q2. That will help keep the economy humming along quite nicely along with the $100B or so of tax refunds from the excess withholding in 2003 after those tax cuts kicked in.
Repeal tax cuts? You have to be joking.
Once again we are seeing economic improvement at a rate not seen since the early 1980's when the Reagan tax cuts kicked in. Sure the economy had a long way to come back from the lofty heights, though if you listened to what Greenspan said, the recession was not that long or deep. Remember how he and others said the recovery would be much slower because of how 'shallow' it was? That overlooked the fact that it plunged from 7% GDP growth rates in 2 quarters. That ignored the power of well-timed tax cuts in an economy starved for capital investment. Greenspan obsessed over the consumer side as the economy soared (recall the comments regarding the 'runaway' consumer), and he obsessed over the consumer when the economy slowed. That is why said the recession was not that bad (the consumer never slowed that much), and, ironically, why he was so focused on the demand side in attempting to spur a recovery. He crashed the economy over fear of the consumer sparking inflation (at least that was the public line), and then bet the farm on the consumer to pull it out of the recession his actions to stall the consumer caused. Getting confused? The real irony is that he would not have succeeded but for the tax cuts that spurred business investment after it had gone dormant for 3 years. The moral of the story: put your economic faith in tax cuts focused on reducing marginal tax rates, reducing taxes on capital gains, and providing incentives for businesses and individuals to invest, not on the Federal Reserve cutting interest rates.
The economy is, as seen in Q3, hitting its stride. The tax cuts are spurring more and more economic activity, not the 'one shot' stimulus that the static thinkers moan about. They don't get it. When you stimulate the supply side of the economy it will not only meet demand, it will create demand. It has occurred time and time again in the history of the US economy, but some refuse to acknowledge fact. It is almost funny how Bush said it was time to cut taxes as did Kennedy and Reagan, how the naysayers howled in anguish, how the economy has surged in response, and how the naysayers still howl in anguish. Spending on entitlements and BS funding that the federal government has no business being involved in has got to slow to reach the potential of the cuts, but we shudder to think where we would be without the economic stimulus. The deficits would still be the same because the tax revenues would be even lower and the spending would still be through the roof. At the very least we have a tax revenue producing machine going now that can pay for some of that spending. That is a much better position to be heading into the new year with. Indeed, even with the spending gone wild the deficits are already less than expected thanks to that additional revenue thrown off by the surging economy.
Jobs on the horizon.
This Friday the jobs report is out and expectations are starting to run high with 140K expected after the 57K in November. The weekly jobless claims hitting a 3 year low (339K) is fueling that anticipation. The ISM report is fueling more speculation with the manufacturing sector now adding jobs. Some are saying one million jobs in 2004. That sounds a bit light, but it is heading in the right direction. The important thing is to stay the course with the economic stimulus that provides incentive to invest and let business rebuild without imposing more burdens. Of course the IRS is now focusing on small businesses just as they are getting back up on their feet. The slap down the IRS got back in 1998 has been swept under the rug as tax revenues fell off. They blame it on lack of staff to chase down tax dodgers, all the while ignoring the recession that was the major contributor to slumping tax returns. The better course of action is to let the businesses do what they do best, i.e., produce and create jobs. That is how tax revenues rise: businesses taxed and the employees taking those new jobs are taxed. The best of both worlds for the feds and the IRS.
THE MARKET
The Friday whipsaw action was the aimless wandering before the real action starts this week. Buyers tried to push the market higher but got cold feet, prompting the sellers to move in. In the end a null session. Overall, the indexes remain in their uptrends but the large caps look ready to pullback after reaching the top of their uptrends. The small and mid-caps still have room to move higher and can provide some action while the large caps take a breather.
That is what is set up, but how the market reacts when all of the money managers get back to start the new year remains to be seen. Perhaps late Friday was a harbinger of what to expect, but we are not reading much into the distribution on SP500 and DJ30 that followed the Wednesday churn on NASDAQ. That has us watching closely what the mutuals and hedge funds do this week, but we don't view those sessions as indicative of what this week will bring.
Market Sentiment
VIX: 18.22; -0.09
VXN: 24.51; +0.02
VXO: 17.94; +0.43
Put/Call Ratio (CBOE): 0.75; -0.5. After surging wildly Wednesday as positions where shuffled before the end of 2003. It was still high Friday, but the indexes look ready for a pullback.
NASDAQ
Second consecutive doji after breaking higher Monday out of its 3 month lateral consolidation. Ready to test that move.
Stats: +3.31 points (+0.17%) to close at 2006.68
Volume: 1.669B (-6.04%). After churning some to end the year on Wednesday NASDAQ just stalled out on below average volume to close the week.
Up Volume: 1.161B (+255M)
Down Volume: 484M (-358M)
A/D and Hi/Lo: Advancers led 1.48 to 1. Breadth was 2.1:1 through lunch, but faded as the index faded late.
Previous Session: Decliners led 1.37 to 1
New Highs: 237 (+27). Still pathetically low even as NASDAQ managed another 52 week high.
New Lows: 3 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke out of its three month consolidation on Monday but volume was below average and it could not add much to that move to close out the week. Indeed, it stalled out, churning some on Wednesday and showing a tighter doji Friday on below average trade. The lack of volume on the breakout move casts doubt on the ability to hold the break higher. It has been testing the move all week, tapping 2000 on the lows and rebounding. It is trying to form up 2000 as support and it has been trying to take back some of the leadership from the large cap cyclicals. After some further testing of 2000 and perhaps back to the 10 day MVA (1983) it will be set to try again toward the double tops at 2048 and 2100 from early 2002. A bit more testing would allow some of its stocks to work on their bases more and provide more strength on a resumption of the breakout move. That is what it looks like, but we have to see what the big money does when it returns this week. Bases have been forming, and we will start seeing indications as to whether they are going to start their moves higher.
S&P 500/NYSE
Reached up toward 1120 on the high and gave it all back and more on rising trade. May be ready to take a breather.
Stats: +0.11 points (0%) to close at 1108.48
NYSE Volume: 1.135B (+15.14%). Volume rose as SP500 reached higher and reversed. That is distribution even though volume was below average. Not too concerned with the action given it was below average trade. The key will be what volume does when it pulls back this week. Price/volume action has been solid up to this point, so it will take more than a session or two of higher volume selling to break the index down.
Up Volume: 593M (+72M)
Down Volume: 526M (+92M)
A/D and Hi/Lo: Advancers led 1.16 to 1
Previous Session: Decliners led 1.09 to 1
New Highs: 467 (+34). There has been a good expansion of new highs on the rise, topping 600 early last week on the break higher. Very solid showing.
New Lows: 16 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 broke higher two weeks back, increasing the angle of its rise within its uptrend. A solid break higher on volume to start the move that put on almost 50 points on the index. The reversal Friday on volume after a stronger run indicates it needs some rest toward the 10 day MVA (1099) or the 18 day MVA (1089) before making another run at 1150 to 1175 peaks of the early 2002 double top. The Friday churn is something we are watching in the event the higher volume selling continues and there is a rotation back to growth areas, but we not reading much into that Friday trade. The index is still in a strong uptrend and is simply in need of rest.
DJ30
Stats: -44.07 points (-0.42%) to close at 10409.85
Volume: 168 million versus 139 million.
Showing some wear after the 900 point run from the 50 day MVA. It reached higher Friday to 10,527 and reversed, a 143 point reversal. As with the SP500 it is showing some signs of wear in its strong uptrend as it bumps up against the upper channel line (10,475) in its uptrend. That should send the index back for a test of the 10 day MVA or 18 day MVA (10,337 and 10,232). That sets up a nice range for it to run to resistance at 10,600 where that big range of overhead supply runs on up to 11,000.
THIS WEEK
The big money comes back to the market this week and after the low volume rise during the holidays we are going to see where the big money wants to send stocks. The large cap indices are set for a test back after such a strong run and that is what we are anticipating. Now the small caps, after some trouble on Wednesday, held the 10 day MVA and are set to make a higher low. The mid-caps are in similar shape. January can typically be a good month for small caps, and though they have already made a run higher, they are set up within their uptrend to provide another bounce up off of near support.
Bigger picture the indexes have been in an uptrend for almost 10 months. DJ30 and SP500, after strong uptrends, have surged at an even stronger pace. Such a surge after a long run is something to be wary of. We have discussed a rotation back into growth stocks at some point, and when a stock or index surges at a sharper pace after a long run that can indicate a rotation is in progress, particularly if volume starts to rise on some churning sessions (no gain at the top of a run on strong volume). We are going to keep a close eye on that. At the same time NASDAQ has been consolidating for three months and tried a small breakout last week. Its stocks are still setting up new bases along with some small caps, and if money flows out of the cyclicals that have led the market the past month (as it always ultimately does), the growth stocks will be set to start to move once again. In short, the market is setting for a rotation back into growth stocks, but it may take longer.
Overlaying all of this is the resistance ahead, the most obvious is the long and thick band of overhead supply on DJ30 from 10,600 to 11,000. As noted last week, we don't want to give the wrong impression that this will kill the uptrend off the low. It is simply an area where a lot of stock was bought right and then the market failed. NASDAQ and SP500 show double tops as well up ahead. Those also represent overhead supply. Now the time that has passed tends to ameliorate the strength of the resistance as that supply is sold off as the market fell further. When talking with many mutual fund investors, however, we know there is still overhead supply because we are hearing a lot of 'our funds are just now getting back close to where they were and I hold my husband/wife to get our money out when they get back close to even.' That, dear friends, is the definition of overhead supply. It is still out there and the market will still have to deal with it.
Dealing with it does not mean stocks will tank, but most likely they will struggle, rising and falling in attempts to take out the resistance. That may be what sends the large cap indexes into a consolidation. That remains to be seen. For now we are watching those NASDAQ patterns that are developing as well as the smaller caps that are set to make the moves. Many cyclicals are very extended, vulnerable for a pullback. They can still move higher on the momentum and some are in decent short consolidations. Given the return of the money managers we are going to keep our options open with respect to new positions.
Support and Resistance
NASDAQ: Closed at 2006.68
Resistance: The March/August up trendline (2012) is some potential resistance. The January 2002 double top (2044 to 2099).
Support: December high (2000), November high (1992). The 10 day MVA and the 18 day MVA (1983, 1969). The 50 day MVA (1938). 1875 to 1880 is the bottom of the November range.
S&P 500: Closed at 1108.48
Resistance: Minor resistance at 1115. 1150 to 1175, the early 2002 double top.
Support: 1100 represents some early 2001 lows and 1106 from a May 2002 top. The 10 day MVA and the 18 day MVA (1099, 1089). 1080 from February 2002 lows. November high (1061.40-1064).
Dow: Closed at 10,409.85
Resistance: 10,475 (upper channel line). 10,600 (March 2002 peak).
Support: 10,353 from May 2002 high. The 10 and 18 day MVA (10,337 and 10,232). 10,259 (January 2002 high). The exponential 50 day MVA (9980).
Economic Calendar
1-05-04
Construction spending, November (10:00): 0.5% expected, 0.9% October.
1-06-04
Factory Orders, November (10:00): -1.4% expected, 2.2% October.
ISM Services, December (10:00): 60.8 expected, 60.1 November.
1-08-04
Initial jobless claims (8:30): 345K expected, 339K prior.
Wholesale inventories, November (10:00): 0.5% expected, 0.5% October.
Consumer credit, November (2:00): $4.6B expected, $0.9B October.
1-09-04
Non-farm payrolls, December (8:30): 140K expected, 57K November.
Unemployment rate, December (8:30): 5.9% expected, 5.9% November.
Hourly average earnings, December: 0.2% expected, 0.1% November.
Average workweek, December: 33.9 expected, 33.9 November.
End part 1 of 2
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us stock market
understanding the stock market
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