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1/16/04
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TONIGHT:
- Stocks not to be denied as more money pours in on solid earnings news.
- Dollar rebounding, sentiment surging. On the cusp of a breakout?
- Market continues its run, daring you to sit it out, daring you to get in.
- Subscriber Questions.
Earnings trigger surge out of short lateral consolidation.
Friday was the January expiration and that no doubt contributed to some of the volume, but it is hard to argue with the overall surge in trade this year as stocks have surged higher. Rising prices on surging volume show big institutions buying stocks (along with everyone else). They have the trillions of dollars to invest and when they do so the market moves on volume. Friday they did so again after a very short, lateral consolidation, spurred by excellent earnings from JNPR and a bullish conference call that appeared to sound the George Costanza mantra “I’m back, baby.”
On top of the IBM earnings and the GE profit report (has anyone heard from Vandalay Industries yet?), the JNPR news threw some gas on the rally that was running out of a bit of steam. NASDAQ gapped higher, fought off some selling attempts, then rallied to the close. The large caps were lagging, but the exuberance in NASDAQ turned them higher to the close as well. Only the small caps lagged, something of a concern as they have been the number two leader group.
Overall the action was solid with the indexes making new 52 week highs yet again (even the small caps), and the leaders were again leading, exploding higher in continued runs, blasted out of bases with new breakouts, or shot higher after breakout tests. It was clearly tech dominated and there is still an overbought condition, but in the glow of good news Friday, investors were overlooking that issue.
THE ECONOMY
Dollar continues its recovery.
What a week for the dollar. It rallied 1.4 cents against the euro on Wednesday and then Friday posted a huge 1.95 cent gain. That makes 4.65 cents for the week. In currency terms, a huge move. As we reported earlier last week, rumors of an EU intervention and then actual comments from EU central bankers grousing about the dollar’s fall helped spark a dollar upturn.
In addition, Friday the Treasury reported foreigners were back to buying US assets in droves in November, snapping up $87.6B worth versus just $27.8B in October. Remember our discussion of how the weak dollar causes assets to be sold in search of greener pastures and improving economics but then actually causes reinvestment when the trade balance becomes attractive again and sentiment shifts regarding the economic outlook? Some of that appears to be occurring as the US economic boom, albeit somewhat uneven here in its early stages, continues to pick up pace (as compared to Germany, on of the EU’s largest economies, that has slipped into recession). The economic reports get stronger and stronger along with earnings reports. Even though interest rates are low and thus reducing foreign investment US assets with returns based on higher interest rates, the prospects of equity and other assets increasing in value is generating a move back into US assets.
That move out of the euro and back to the dollar and dollar based assets is being hurried by EU officials complaining about the euro’s strength and hinting at the notion of an EU interest rate cut. Rate cuts tend to make a currency less attractive because the easiest way to make money, i.e., interest bearing accounts, sees a drop in yield. That makes them less desirable. With the US Fed in effect telling the world that it is going to keep US rates low for 2004, the EU is feeling the heat to do something to soften the euro. As we have seen with the dollar, it does not take much to start a currency sliding. Once it does, it takes an awful lot to firm it up.
Thus far we cannot say this is a trend or anything other than a strong bounce in a continuing downtrend for the dollar. The dollar index is still in a downtrend and is just now rising up toward its 50 day MVA that as acted as resistance since the decline started in early 2002. We will keep a close eye on how it performs at the 50 day to give us a better idea of the strength of this dollar move.
Business inventories rise in November, but not enough to offset stronger sales.
Inventories rose 0.3% in November on the heels of a 0.4% gain in October. That beat expectations of 0.2%. Sales jumped 0.5%, meaning more goods were sold than manufactured. That kept the stock to sales ratio at a record low 1.35 months, the time it would take to sell out current stocks of goods. Sales keep rising faster than producers are making the goods.
While everyone assumes that this is leading to a strong increase in production as inventories are restocked, December industrial production reported Friday showed only a 0.1% increase (0.5% expected and 0.9% in November). For the year that is a 2.9% gain and a 6.2% annual rate for Q4. It is it is definitely picking up speed, but it got a late start as supply side tax cuts came late, and the jump is not as rapid as anticipated (hoped?).
There is a lot of talk about how the surging productivity is helping manufacturers produce without having to hire. It appears from the economic reports coming in that manufacturers have yet to really start producing in mass quantities. Thus it may not be all of this great productivity that is keeping hiring down, just companies not yet ready to hire the workers needed to really ramp up production. You have to realize that, while many are starting to believe in the recovery, many question its duration and at least as many doubt the stock market has entered a new bull run. After getting slammed by overproducing in 1999 and 2000, many are reluctant to go out on the limb for this recovery. They are playing it safe as long as they can without making big commitments. We thus believe it is not productivity that is alone keeping hiring at bay, but just typical, good old fashioned doubts about the future.
Eventually that will change and they will throw workers, machinery, and whatever it takes to meet demand. For now there is still a lot of caution in manufacturing. As we have noted previously, the lack of production in the face of surging demand leads to inflation as supply cannot equal demand. The tax cuts were needed and are working, but they may have come too late to get the supply side of the economy up and running to meet demand before a strengthening economy caused a demand surge. Thus there are inflation seeds being sown in this recovery.
Michigan sentiment surges.
After an obviously inaccurate preliminary reading for July, the Michigan Sentiment revised version came out Friday, and the differential was huge. 103.2 versus the 92.6 originally reported. The first report showed very weak current conditions enthusiasm. This was the highest level since 107.6 in November 2000 as sentiment peaked just as the bottom fell out. The big change was in the current conditions segment that jumped to 108.9 from 97. Expectations were not shabby either, rising 10 points. For what it’s worth the report was solid. Of course the prior report was sour. This ‘indicator’ is turning out to be as volatile as the durable goods or factory orders reports each month.
Boat Show indicator is disappointing, but sheds some light on the ‘uneven’ recovery.
What about real life? Each year we go to boat shows. Of course we do it for strictly business reasons; it helps us get a better grasp of the actual swings in the economy. We, along with several large boat shops we interviewed, were expecting a big year in numbers of boats sold. The Houston show ends this weekend after 9 days. While the last weekend is always big and boat shops hope it will bring out the buyers, the sales in units have been disappointing. Several are actually down in the number of boats sold from last year which was down from 2002.
On the other hand, total sales dollars are up as more higher end boats with bigger margins are sold. Some sellers are taking that as an indication that the recovery is underway because the high end always moves up first (it is also the last to turn down when the economy goes south). We heard predictions that by Q2 2004 the rest of the market, the lower end, would be surging. This scenario is intriguing as many complain of a recovery that is helping the high end but not the low end. Retail sales at expensive shops performed much better than discounters at Christmas. Management requests are coming in to staffing companies while lower level hires are so-so. Optimism among lower income brackets lags the higher brackets. While some complain of the uneven recovery, this is how it typically occurs: the higher end recovers and creates the jobs below.
We could very well be seeing parallels in the economy that no one is pulling together yet and could give us a better view of where the recovery is. Jobs are being created but a lot of the new orders are for highly compensated positions, and those are a much smaller percentage of the entire job market. Sales at high end retailers are strong while the lower end has not seen the same surge. This sounds a lot like an economy that is getting started from the top down as usual, but after the severe bust there has been reluctance to ramp up even as the economic signs are there. Much as an investor gut punched by a bear market is leery of moving back into the market even as it screams it is time to get in, there has been hesitation to really ramp up even as the recovery has started to run. Thus, we could indeed see an explosion of jobs and activity at all levels over the next 3 to 4 months.
THE MARKET
Another surge higher on volume put an end, for now, to the short lateral consolidation of the past week. NASDAQ and SP500 jumped out of their lateral consolidations as NASDAQ tries to put some cushion between it and the 2100 level. DJ30 is still fighting with its upper channel as well. The move was strong, but the market is still overbought and without rest.
As we saw in the fall of 1999, the market can rally on these short, lateral consolidations indefinitely. With a good outlook keeping money moving into funds, those funds are going to put the money to work. Even so, 45% of the fund managers responding to an ISI Group survey said this was not a new bull market. Thus they are putting money into the market (they have to put at least some of the new money to work), but they still are not fully invested. That is the key to a continued rally: plenty of fuel (money) on the sidelines that can be pulled in. If skepticism remains, that keeps money diverted elsewhere or held back from the market, and that keeps the market from flaming out as there is always more money to come in.
Stocks don’t rise indefinitely, however, even with new money coming in and more money still on the sidelines yet to budge. Even the strongest surges see intermediate pullbacks or corrections, and this market, even with the lateral consolidation last week, is still overbought. It is one of those situations where we were moving into a lot of NASDAQ stocks in December when the action was still sideways but stocks were setting up and starting to move higher. Those are making us great money, but the market continues to surge ahead. Do you keep on moving in or do you back off?
We have been cautious with our plays, limiting them to great patterns and strong moves. That still gave us many entry points as the market has continued to show strength on strength, rising higher and higher. This past week allowed more solid stocks to set up and then break higher as the market continued its move. At some point it will correct and the last positions taken will cost investors money. Again, do you keep moving or do you back off?
We take a pretty simple approach. We like to take what the market is giving, and when it is surging we will participate as long as there is no obvious train wreck in the making. As long as we see stocks in solid patterns and in good sector making good moves that indicate heavy buying, we will move in. We have to temper this with where the market is in its life cycle and where the economy is, but those macro views are often overshot by the shorter term moves (e.g., in the late 1990’s rush higher when you knew it was going to correct hard, but timing was the big issue). Thus we are seeing good moves and investing in those. At the same time we are very aware that once the initial excitement about earnings strength subsides we will see a pullback. Thus we buy in and let stocks run, but as on Friday, we will take at least partial gains when they are there, keep tight rein on option plays, and keep our stops a bit tighter. If stocks are going to keep running as they have, some tighter stops won’t hurt. When the excitement regarding earnings dies down, then we can start taking more gains and also let some trailing stops work for us.
There is a mix of short term and long term plays on the report. How to we differentiate? Options are by nature more short term. Some plays we are only looking for a small gain. On most, we let the play determine its life. If it is running and making us a good return we are going to let it keep doing so. We have some plays that have been on the report for many, many months as they continue their uptrend after an occasional dip that consolidates but still keeps within the trend. Those are stock plays at this point as we have long taken the option gains on those plays. As we note in the seminars, we would prefer to hold stocks for years and years as in the 1990’s when CSCO, DELL, MSFT, INTC and friends maintained long, steady uptrends. Some we have now are trying to do just that. After this latest run starts to run out of gas we will sell some call options on those positions, let the stock fall to support, then buy the calls back to bank some nice profit while the stock took a breather. In sum, in most cases we let the stock determine whether it is a long or short term play. Preconceived notions can be killers in the market.
Market Sentiment
VIX: 15; -0.56
VXN: 20.24; -2.4
VXO: 15.27; -0.96
Put/Call Ratio (CBOE): 0.51; -0.07. Edging lower but still above the 0.3 to 0.4 level that can signal excess complacency that can result in a pullback.
NASDAQ
After a 5 day lateral move just below 2115, good news regarding tech earnings exploded the index higher in what could be the second breakout move from the October - December consolidation.
Stats: +31.38 points (+1.49%) to close at 2140.46
Volume: 2.619B (+16.63%). Surging volume, the second highest in a month that has seen volume jump to consistently high levels not seen since NASDAQ really started to rally in May to June 2003 as it broke higher near the Iraq war. Before that we have not seen this kind of consistently strong trade since July 2002 when NASDAQ sold into the first leg of its final double bottom to end the long downtrend. What does that mean? This type of volume is watershed; it tends to occur at certain inflection points in the market. With volume being primarily accumulation volume in January, volatility holding at low levels and not spiking, and NASDAQ having just broken out of a 3 month consolidation, the watershed could very well be significantly more upside.
Up Volume: 2.107B (+1.011B)
Down Volume: 474M (-627M)
A/D and Hi/Lo: Advancers led 1.61 to 1. Not a blowout for techs across the board as the larger cap techs were in the lead.
Previous Session: Advancers led 1.09 to 1
New Highs: 435 (+105). Not bad. Not outstanding, but not bad.
New Lows: 4 (-1)
The Chart: (Click to view the chart)
Three month lateral consolidation from October to December, a big breakout to start the year, a 5 day lateral move, and now another break higher. All of the post breakout moves have been on tremendous trade with NASDAQ topping 2 billion shares every session of the year except the first trading day on Friday following New Years. Money continues to surge into technology stocks, fueled in anticipation of good earnings, and on Friday, actual news of earnings. NASDAQ stocks used the consolidation to form up well and are breaking out right and left. The price/volume action had weakened the past week, but NASDAQ showed real strength in utilizing a slight sideways move to consolidate and then break higher. We will have to see how it deals with the gap; the session(s) after a big expiration can go the other way a bit and it may try to fill it. Still, waiting for that fill can be a losers game to an extent. Of all the indexes, NASDAQ is the least overbought having just come off of that 3 month consolidation.
S&P 500/NYSE
Large caps took a bit of coaxing, but with GE leading the way they rallied to close at the session high on strong volume.
Stats: +7.78 points (+0.69%) to close at 1139.83
NYSE Volume: 1.713B (+1.05%). Another session of strong volume. Price/volume action had stumbled during the lateral move last week with volume rising on down sessions and dropping on up sessions. Thursday it found footing on rising volume, and Friday it bolted higher on stronger trade. A solid month, though not quite the same caliber as NASDAQ volume, it is on par with the July and October 2002 bottoms in the double bottom. It is also, and importantly the best volume month of the uptrend since that bottom. That is a significant indication of the strength of the trend.
Up Volume: 1.248B (+384M)
Down Volume: 447M (-352M)
A/D and Hi/Lo: Advancers led 1.36 to 1. With small caps lagging breadth did the same. That was the chink in the armor.
Previous Session: Decliners led 1.01 to 1
New Highs: 458 (+19). Decent A/D, but not blowout.
New Lows: 0 (-3)
The Chart: (Click to view the chart)
The short lateral move gave way to a volume break higher Friday. Strong GE earnings helped other large caps such as MMM and UTX jump out of their lateral moves as well. The Friday move had both cyclical and growth stocks rallying, a powerful combination we discussed in December right before NASDAQ broke out of its 3 month consolidation. Perhaps they can all rally in peaceful harmony. Unlike NASDAQ and its growth stocks, however, SP500 is still rather extended from its breakout in late summer. Many of the cyclicals have had a brief respite, and that has renewed their upside legs. They could thus give another good run for a week or two before running into the early 2002 double top at 1150 to 1175.
DJ30
Stats: +46.66 points (+0.44%) to close at 10600.51
Volume: 254 million versus 260 million. Another solid volume session.
DJ30 tested the 18 day MVA (10,431) last week and then rebounded to close the week over the upper channel line (10,580). It still has not made the break over that resistance, and it is just entering a wide band of resistance from the Friday close to 11,000. It has been rising but struggling at the upper channel line the past 3 weeks; not bad work if you can get it. It did not participate in a big way in the Friday move, however, even with the likes of GE, UTX, IBM, and MMM on the move up it could not muster a half percent gain. Of all the indices DJ30 is the most extended. Will it lead a pullback or follow along as NASDAQ plows higher? More likely it will struggle along, make its own pullback after the cyclicals make another move here while the rest of the market prices in economic growth.
The Chart: (Click to view the chart)
THIS WEEK
Monday is a market holiday. A market often shows its stripes ahead of a holiday weekend. If there is concern it will close off its highs or close negative as short term investors close out positions to limit exposure. If it rallies hard in the face of a long weekend, it is a sign of confidence to maintain positions and even add to them as the holiday approaches.
Friday was also an expiration Friday, and how a market closes on expiration is often taken back some the following session(s). The expiration magnifies the trend as positions opposite it are rolled over or closed. When the fuel from the expiration is over, the market tends to revert more to the norm and that means taking back some of the expiration induced action. That could also set up some pullbacks from the late week breakouts, choice buying opportunities.
What fuel is there from here? Little in the way of economic reports this week, but earnings will be kicking into high gear the next two weeks. We have discussed the past week how in an uptrend or recovery the first wave of solid earnings reports are met with buying, but then later reports fail to produce upside and the market even pulls back. This season started rough (e.g., INTC), but some other key names have come through big (IBM, GE, JNPR). That has sparked this new jump higher. Even if earnings continue to surpass expectations, however, that expectation will be built in quickly and the later results will most likely be met with some selling. That is the typical pattern, but we are quick to note that it is not a major selloff we are talking about. When the uptrend is solid the underpinnings for a continued move higher are there; the market needs to pullback to consolidate gains even as it moves higher.
NASDAQ started a good break higher after its first post-breakout consolidation. That opens the door for more upside as it continues its trend higher even as earnings barrage the market. That should help drive our current positions closer to their targets where we will continue to lock in gains in anticipation of the next pullback. We continue to also take partial gains and let the rest run higher; we have many positions where we have already taken some gain and are letting them work higher. After this new leg starts showing signs of peaking we can decide if we want to close out more (with options, for certain) or let them pullback and add to positions when they test support and start back up.
There are also many stocks still in excellent patterns that are or are ready to breakout. While we view a pullback coming in a couple of weeks to test the earnings run, many can still breakout and run well and give us a nice ‘cushion’ for a pullback where we can decide if we want to add to the positions.
Support and Resistance
NASDAQ: Closed at 2140.46
- Resistance: First upper channel line at 2140. 2200 then 2300 represent tops from Q2 2001.
- Support: 2115 acted as slight resistance as NASDAQ consolidated. The second peak in the December 2001/January 2002 double top (2100). The lower peak in the January 2002 double top (2044). The 10 day MVA and the 18 day MVA (2090, 2058). The March/August up trendline (2050).
S&P 500: Closed at 1139.83
- Resistance: 1150 to 1175, the early 2002 double top.
- Support: The 10 day MVA and the 18 day MVA (1122, 1113). 1106 is a May 2002 top. 1100 represents some early 2001 lows. The former upper channel line at 1089. The 50 day MVA (1085).
Dow: Closed at 10,600.51
- Resistance: 10,580 (upper channel line) is still pulling on the index. 10,620 (March 2002 peak) starts the swath of overhead supply that runs up to 11,000.
- Support: The 10 and 18 day MVA (10,507 and 10,431). 10,353 from May 2002 high. 10,285 the March 2003 up trendline. The exponential 50 day MVA (10,160).
Economic Calendar
1-21-04
- Housing starts, December (8:30): 1.983M expected, 2.07M November
- Building permits, December (8:30): 1.86M expected, 1.863M November
1-22-04
- Initial jobless claims (8:30): 340K expected, 343K prior.
- Leading economic indicators, December (10:00): 0.2% expected, 0.3% prior.
SUBSCRIBER QUESTIONS
Q: Thanks for the GREAT Alerts & Newsletter commentary. I am now much wiser and MUCH richer too. Keep up the great work. On many occasions, you include the comments "Doji may indicate a change in the pattern." Many times I have a hard time understanding whether you mean that the new direction will be up or down. The reason I am confused is that for example we are in a LONG play and the stock has come back (say 4%) to test the breakout and now a DOJI occurs on high volume. Now does that mean that the change in direction will be up or down?
A: Congratulations on your success. We strive to provide the best investment, trading, financial and economic data, but it is up to the investor to act and take advantage of the opportunity. Great job. Also, great question. When the market is in an overall uptrend, and particularly the stock we are playing, we like to let part of our position on stocks that are making a strong surge continue to run even after they’ve hit the initial target. Most stocks will follow the market, so if there is a strong uptrend we are more confident with that strategy. Once a stock makes the move we want and hits its target price, taking half of the position off the table and letting the rest run can make the most out of a strong move while already locking in some nice profit. We can then look for the next entry point for the stock if it remains strong and is proving to be in a longer term uptrend. That way we have protected some nice gain and are already ahead when a leader shows us it is ready for the next run. Why look elsewhere if it can make us more good money in a timely fashion (i.e., compared to other strong stocks it is a good place to have our money)?
We issue alerts on stocks that have reached target, and will note at that time if we are leaving part of the position, stock or options, to continue to work in the uptrend. We’ll also let you know in the continuing watchlist. We really have to see how the stock is moving when it hits the buy point, e.g. the volume, whether it is a new breakout higher, etc. For your own decisions look at whether the move is peaking after a ballistic shot higher or if it hits the target after a consolidation and blasts higher on a new breakout. The former would indicate taking the position off the table if the stock could fall a long way to near support and give back much of the gain. In the latter we would let it run even more before taking some gain, but would look at taking a partial position when the run was slowing, letting the strong trend work for us.
Another consideration has to do with timing. If we are using options we always have to consider the time decay for options we have purchased. Can we let it drop again and make a test of the move and rally back without losing time value? If we are getting within 60 days of expiration we tend to close it out. If there is plenty of time and there looks to be plenty of upside ahead, we can take half the gain and let the rest work for us, but we still have to be careful not to let it fall too far back given the limited time we have on option positions.
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