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world stock market, us stock market
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1/10/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: PMTI; OTEX; FSII; NANX
Buy alerts issued: ONNN; SYMM; PHTN; ILXO; RHAT
Trailing stops issued: None issued
Stop alerts issued: OSTK
MARKET SUMMARY
Market bounces back from disappointing news but cannot hold to the close.
We felt the market was ready for a breather and it looked as if the jobs data was going to provide the catalyst. The report not only missed expectations, it missed in a grand way. NASDAQ futures were down 14 points versus fair value, and the techs were down 20 points right after the open.
The selling was over in 15 minutes, however, as once again buyers entered the market on weakness. NASDAQ turned a 23 point deficit into a 13 point gain, an excellent bullish reversal yet again. Moreover, it was done in the face of very disappointing news regarding job creation, another bullish indication.
The clear sailing came to an abrupt end, however, just after lunch. The terror alert level was lowered to yellow, but that did not prop up stocks. After a very nice three week run with strong volume, bullish intraday action, and strong leadership, stocks ran out of buyers. NASDAQ and SOX reversed, showing dojis on the close; after a run higher that can signal a swing in momentum and set off a pullback. SP500 and DJ30 tried to rally as well, but they collapsed, closing at session lows with DJ30 thudding down to the 10 day MVA.
In short, stocks reversed the action that had been so bullish. They did not sell on rising volume, however, nor did the leaders break down. Indeed, several sectors again enjoyed nice gains. It was not a breakdown. The market looks ready to make the pullback that it needs.
THE ECONOMY
Not 100K, not 200K, but 1K. Jobs report fails to deliver.
This is the report we were looking for back in late summer to deliver the first job creation. Jobs started showing up, however, in September, well ahead of schedule. The 50K+ created in November led to expectations of 157K in December with the 'whisper' number in the 200K to 300K range. We were looking for a big pop in December as well given all of the other economic indications showing a surging economy. It did not happen in December.
Jobs limped in at 1K. November was revised down to 43K while October was revised to 100K from 137K. The unemployment rate fell to 5.7%, but that was because over 309K workers left the work force and there were fewer potential workers looking for jobs. That is typical action in the start of a recovery: workers get excited and start looking again before there are enough jobs to absorb them. They get disappointed and leave the workforce. Friday was a disappointment because with what was truly early job creation starting in September (based on when the true economic indicator started the clock, i.e., last October when the stock market bottomed), expectations were the economy was going to spout jobs like a fourth of July fireworks display. Instead manufacturing lost another 26K, retail dropped 38K (California grocers strike), while professional and business added 45K. There are certainly no uniform gains across the economy.
Out of sync with the economy?
The data appear out of step with the other economic data that has shown dramatic increases in business spending to go along with the consumer spending that never really faded. As of yet, that confidence that has shown up in CEO and other business surveys has only translated into capital investment, not hiring. No doubt many more people are working than are picked up in the jobs report. It does not measure the startup of small businesses, those people that struck out on their own after finding no traditional jobs. That is what yours truly did out of college in 1981 when jobs were non-existent.
Nor does the report measure temporary jobs. They gained 30K, the eighth consecutive rise. Staffing and outsourcing firms continue to note solid improvement in their business. These are no longer secretaries (the Kelly girls). Accountants, lawyers, engineers. Companies are also outsourcing their personnel departments, accounting departments, etc. It is interesting that staffing firms are noting a pickup in outsourcing these areas, particularly the middle management levels. The jobs report also showed an increase in professional and business areas. It does not pick up these outsourcing or temp jobs, so when you consider both it and the temp staffers are seeing an increase, there is quite an increase in this level indeed.
Putting it into perspective.
Why does that have significance to the rest of the job market? Because staffers will tell you that the mid to high end of the labor market is always the first to pick up when hiring starts, and that is precisely what they are seeing. As one said, it 'trickles down' from there. Despite the December disappointment, the economic data is building up an impressive backlog of pressure. When the jobs dam bursts it is likely to show that 200K per month job growth. It is still just the December report, the first report we could expect job gains. Jobs actually started showing up in September, ahead of schedule. We propose that contrary to the standard line heard in the news or on financial stations, job creation is still ahead of schedule. With the surging GDP and capital investment, the jump in the ISM employment index, and the sharply higher CEO and business confidence surveys, we anticipate solid job growth in Q1.
Fed on hold indefinitely.
We said back in 2002 and in 2003 when the economy started to surge and there was talk of the Fed raising interest rates that the Fed would not raise rates until job creation not only started but was really jumping. The Fed had dropped hints all along that would be the case. It did it again earlier this week when Fed governor Bernacke said he remained worried about job creation as an impediment to the economic recovery. The 1K jobs increase in December allows the Fed plenty of room to continue its desired easy money policies even if job creation starts in earnest this month. It wants to see a series of consecutive months of strong job creation to establish a solid uptrend. Even with that it might take until 2005 before the Fed feels everything is in sync.
Signs that the dollar slide could end abruptly in the near future.
It is becoming clearer what the Administration's plan is regarding the dollar. The Administration wants to be able to show the rest of the world it believes in free markets as long as they are fair, and will take necessary actions to accomplish this. That is why it stuck tariffs on Chinese goods and steel products, knowing full well it would have to remove them, but wanting to show the rest of the world it would take a stand for what it believes or at least to get what it wants with respect to free markets.
With the dollar it is trying to make a point that it does not believe the US should intervene in the currency market, that a stronger economy and weaker dollar will eventually turn the dollar back up as the current account gets more in balance. That may or may not happen; a stronger US economy means US consumers will consume more foreign goods. In any event, it appears that the US is willing to stick to its guns and let the dollar fall versus the yen and euro, thus forcing the backers of those currencies to take action to avoid their currencies becoming much too expensive and seriously impacting their economies.
Japan is already a dollar buyer. Now we hear talk from several sources that the EU is seriously discussing preparations to intervene to weaken the euro vis- -vis the dollar. We had been wondering of the US Treasury would step in after a further slide with a quick buy to set the floor, but now it appears as if it is willing to let the EU join with Japan to do the work. While a US intervention would be the strongest signal, if the EU is also ready to stop the slide, the currency traders will not have the free lunch they have enjoyed. When they become nervous about the ability to play a continued slide the market starts to correct. When that happens that could have a dramatically positive impact on stocks. If stocks get a bit of a pullback or rest between now and then, that leaves room for a good rally.
THE MARKET
Despite reversing the solid intraday action (low to high), the Friday action was not that bad. Volume has surged this week as investors snapped up stocks, sending NASDAQ and the small caps back into the leadership role. Friday volume contracted as stocks sold off. Just as you want to see volume rising on gains to show accumulation and thus sustainability in a move, shrinking volume indicates those buyers are not out dumping the shares they just bought. There is some profit taking, some locking in of some gains, but no complete liquidation of positions. Moreover, some leadership sectors continued to surge (e.g., networking, nanotechnology) as others continued to set up for the next breakout move (semiconductors). NASDAQ and the smaller caps (mid and small caps) have resumed leadership. The cyclical stocks are fading back, but they are not under distribution. That all adds up to continued market health even as stocks pull back.
Market Sentiment
Volatility bounced up Friday, but it is just a bounce up in a continuing downtrend. Volatility can muddle around at very low levels for a long time as stocks continue to perform. That is indicated by the steady volatility slide in late 2002 and all of 2003 as the stock market continued to post higher and higher gains. Many fretted over low volatility during that slide, but even at those levels volatility was not as low as it has been on prior occasions.
VIX: 16.75; +1.14
VXN: 23.01; +1.12
VXO: 15.94; +1.48
Put/Call Ratio (CBOE): 0.65; 0
NASDAQ
Gapped lower on the jobs news, rallied back, but in the end the news could not keep the buyers in the game.
Stats: -13.33 points (-0.63%) to close at 2086.92
Volume: 2.496B (-7.52%). Volume was still above average but lower as the index reversed. After a solid run that can indicate that a pullback is coming. The lower volume means that there was not wholesale selling, an indication that any pullback will be milder.
Up Volume: 1.273B (-576M)
Down Volume: 1.203B (+376M). Up volume managed to outpace down volume on a selling session, another signal that the selling was not heavy.
A/D and Hi/Lo: Decliners led 1.48 to 1
Previous Session: Advancers led 1.63 to 1
New Highs: 348 (-85)
New Lows: 7 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Friday NASDAQ gave its first hiccup in the three week rally off the 50 day MVA. It showed strength after gapping lower, but as we discussed prior to Friday, it was set up for a pullback, and the news was a good enough reason for buyers to step aside ahead of the weekend. The candlestick chart pattern was a tombstone doji, and as the name implies, it is a portent of a pullback. A great breakout in late December and run through the second double top from early 2002 suggests a pullback, but the strong upside trade and the still solid patterns indicate it will be an orderly pullback that is more of a setup for another move where those good patterns (e.g., semiconductors) will lead the way. The double top has thus far proved to be a washout as resistance. Now the main concern is how tech stocks react to earnings that start this week with such names as JNPR and YHOO.
S&P 500/NYSE
The best it could do was test the Thursday close on the high. It fought to get back to that point but then rolled over in the afternoon.
Stats: -10.06 points (-0.89%) to close at 1121.86
NYSE Volume: 1.657B (-10.44%). Sharp reduction in volume from the accumulation sessions preceding Friday. Again this is the action you want to see when a market starts to pull back.
Up Volume: 615M (-632M)
Down Volume: 1.035B (+431M)
A/D and Hi/Lo: Decliners led 1.01 to 1. The smaller and mid-caps helped keep breadth in balance even with an almost 1% loss by the large caps.
Previous Session: Advancers led 1.62 to 1
New Highs: 466 (-40)
New Lows: 6 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
80 points without a breather is a long way for SP500, and the jobs number was enough to do a job on the large caps. They gapped lower, rallied to the Thursday close, but then rolled over to close just over the session low. That is a reversal of the bullish intraday action, indicating further downside. The volume was lower, however, and after a nice run that is acceptable action. SP500 is still holding over the 10 day MVA (1115), the first level of support on these tests back on breakout runs. The 10 day might be too little; the 18 day is at 1105.
DJ30
Stats: -133.55 points (-1.26%) to close at 10458.89
Volume: 223 million versus 238 million.
The blue chips struggled all session, never making it back to the Thursday close (10,592) on the session high (10,589), and that high was where the index opened. A modest bounce failed, and after a 4 hour lateral move it failed and solid to close just over the session low. That kept it right over the 10 day MVA (10,457). DJ30 has struggled the past week even as it trended higher, fighting with the upper channel line to its uptrend that started in August. Volume was lower, a good indication that the selling was not dumping of shares. The 10 day MVA most likely will not hold the index. After a test of the upper channel, a pullback to the up trendline at 10,250 is most likely.
http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
A heavy week of economic data and the start of earnings reports. The market has rallied well ahead of earnings. Friday stocks showed the first indication that they are going to take a rest after rallying in anticipation of earnings. Stocks have a way of toying with you and we could see them start back up again before turning over for the real pullback after bouncing some on the first earnings results.
As noted, there are many stocks still in very good shape, i.e., not extended and actually preparing for a breakout move even as others are extended and need a breather. A continued modest pullback would allow those to finish their bases and those already breaking out to test the move and prepare for the next leg. The latter is one of our favorite entry points.
As for downside, the overall trend is still up though homebuilders look to be once again forming new bases and still have a bit more downside after they have come back to test the support they broke the past week. Those are an example of some potential downside plays, but their put options are very expensive, making it harder to make a solid return versus the outlay. Their volatility has more premium built into the options; selling the calls is thus a decent way to attack the problem as that gives better leverage than selling the stock short with no additional risk over simply short selling.
There are still stocks in good patterns ready to move even as we saw several stocks do so Friday as the overall market sold off. That is one benefit of having a nice, strong trend to invest into with an expanding economy. Money rotates around the market as certain sectors pullback and let off some steam. That gives continuing opportunity.
We are going to be ready for these stocks, but we are also going to be cautious at this point as the market shows it is preparing to pullback. It can rally for a session, pullback, rally another session, and look as if it is going to continue on with the uptrend only to fail and make the test.
We will use that action to take gains as targets are hit or the plays get close enough, particularly with option plays. We can use the market's volatility at higher levels to our benefit that way.
Support and Resistance
NASDAQ: Closed at 2086.92
Resistance: First upper channel line at 2125. The January 2002 double top (2044 to 2099). 2200 then 2300 represent tops from Q2 2001.
Support: The 10 day MVA and the 18 day MVA (2043, 2015). The March/August up trendline (2032). December high (2000), November high (1992). The 50 day MVA (1963).
S&P 500: Closed at 1121.86
Resistance: 1150 to 1175, the early 2002 double top.
Support: The 10 day MVA and the 18 day MVA (1115, 1105). 1106 is a May 2002 top. 1100 represents some early 2001 lows. 1080 from February 2002 lows. The 50 day MVA (1077). November high (1061.40-1064).
Dow: Closed at 10,458.89
Resistance: 10,512 (upper channel line). 10,620 (March 2002 peak) starts the swath of overhead supply that runs up to 11,000.
Support: The 10 and 18 day MVA (10,457 and 10,359). 10,353 from May 2002 high. 10,259 (January 2002 high). The exponential 50 day MVA (10,080).
Economic Calendar
1-14-04
Trade balance, November (8:30): -$42.0B expected, -$41.8B October.
PPI, December (8:30): 0.2% expected, -0.3% November
Core PPI (8:30): 0.1% expected, -0.1% November
Fed Beige Book (2:00)
1-15-04
CPI, December (8:30): 0.2% expected, -0.2% November
Core CPI: 0.1% expected, -0.1% November
NY Empire State Index, January (8:30): 37.8 expected, 37.4 December
Initial jobless claims (8:30): 351K expected, 353K prior.
Retail sales, December (8:30): 0.7% expected, 0.9% November
Retail ex-auto: 0.4% expected, 0.4% November
Philly Fed, January (12:00): 30.0 expected, 32.1 December
Treasury budget, December (3:00): -$12.0B expected, $4.7B November
1-16-04
Business inventories, November (8:30): 0.2% expected, 0.4% October.
Industrial production, December (9:15): 0.7% expected, 0.9% November
Capacity utilization, December (9:15): 76.1% expected, 75.7% November
Michigan preliminary sentiment report, January (9:45): 94.0 expected, 92.6 December
SUBSCRIBER QUESTIONS
Q. Could you please describe in more detail what you mean by "money flow" in
your part 3 recommendations and where one can see this. Is this the technical indicator like "Chaikin Money Flow"that one sees on various charting programs? Keep up the good work. Once again, yours is the first email I go for each day, the most concise and relevant.
A. Thanks for the compliment on the report! The money flow indicator is a measurement of the net positive or negative level of money moving into or out of a stock, calculated using various proprietary methods of measuring the relationships between price and volume. Basically it is a way of determining whether there is, overall, money going into or out of a stock. While the indicator is closely related to institutional buying/selling, it differs because it refers to ALL money moving in and out of stock. Money flow indicators are found on most charting services and software; for the single indicator we use the TC2000 charting program's indicator 'money stream' which is the same thing. Money flow is not a primary, but a secondary, indicator. We use it to confirm or support analysis.
We also calculate money flow beyond using just the charting service measure, looking at many measures of money flow indicators, IBD accumulation tables, block trades and traditional 'money flow' formula calculations. We also look at flows into various types of stock funds and money market funds. With this compilation we generate our view on money flowing into a particular stock.
On the chart, the money flow indicator will track (over a chosen time period) this dynamic, but sometimes it can merely track the price up and down which isn't much of an indicator. It becomes useful, however, when we see either of the following: 1) money flow way up with price still in a base but ready to break out, tending to support our analysis of a solid pattern that presages a breakout; 2) price trying to hold at support but looking weak and money flow falling ahead of it, suggesting a potential move lower. We look for divergences, positive and negative. Positive divergences occur when money flow at the current price is higher than it was at an earlier, higher price. Similarly, negative divergence is when money flow is lower at the current price than it was at an earlier lower price.
If a rise in money flow concurs with other solid indicators, we really like seeing it. As a secondary indicator it can support analysis or let us know we may need to check that analysis again. Money flow can be useful, but we don't base buying or selling decisions on it.
End part 1 of 2
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