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us stock market, trend trading stock
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1/20/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: DRAX; AXYX; NOVA; CHU
Buy alerts issued: CTE; MKTY; EONC; CDCY
Trailing stops issued: OMCL; LNCR
Stop alerts issued: None issued
MARKET SUMMARY
Once again action in the market rotates as market corrects internally.
Friday the larger caps led the market higher in an expiration rally. As is somewhat typical, the leading sectors on an expiration Friday rally were the laggards the next session. DJ30 really struggled and closed negative along with SP500, while NASDAQ managed a gain but it was hard fought. The small and mid-caps were up early and only strengthened as the session continued. Small caps posted a 1.1% gain, far outpacing the rest of the market. Small caps have been leaders from the start of the current rally, and because of that we have focused on them as an important part of our investing. Indeed, in this type of market that has seen many companies become extinct and old leaders lose their ability to grow sales and earnings (and thus limit the growth potential of their stock price), the small and mid-cap arena are where the next generation of household names come from.
Not that the larger caps did not have some impetus to rally. UTX, MMM, JNJ and others reported very solid earnings. After moving up in anticipation on Friday, however, UTX and particularly MMM suffered losses on the session. JNPR and friends reported some solid earnings last week and were handily rewarded. As is typical of earnings season, at some point the reward turns to selling. We will have to see how the next round of tech stock earnings are treated, but it is worth noting that DJ30 again struggled at the upper channel even as some solid earnings were reported.
THE ECONOMY
Dollar gets crushed, market struggles.
Last week the market had a great move versus the euro on speculation as well as comments from EU central bankers that the euro was getting too strong. Someone received a talking to over the weekend as others in Europe were out this week saying that intervention was not really needed. After a strong move up last week toward the 50 day MVA, the dollar was hammered back down before reaching that key point. The market started to struggle as the weakness returned.
State of the union.
Bush delivers the state of the union tonight, and you have to look at market friendly initiatives, e.g., personal savings accounts and social security reform, versus more spending that is the market's enemy because it is the economy's enemy. We have heard Bush has been told to tone down the 'ownership' aspect of his speech for fear of alienating the seniors who fear losing social security benefits. Hopefully he won't listen; the economy likes it when people can keep their money and save it for use in the economy. That helps grow the economy and then everyone benefits.
THE MARKET
Breadth was positive and that was cited by some television post-market commentators as masking good action. It is true that the A/D line was up while DJ30 and SP500 were not. That was the small and mid-cap strength at work. There are more smaller cap stocks than large cap, and when the former lead the breadth will be better. Yes the breadth was better but DJ30 struggled at the upper channel yet again even with some good earnings from key components. NASDAQ and the SP500 showed hanging man dojis, indications of weariness after a long run and potential signals that a pullback is ahead. They are not signals to bet on, just to be aware of as an index continues to work higher.
Volume was lower but still very strong, almost matching the expiration volume last Friday. Again not really accumulation, not really distribution, just some high volume churning once more. That has yet to stop the march higher, but it is yet another signal of a bit of wear and tear after a long run.
In the big picture this has been quite a move, particularly for SP500 and DJ30 that have rallied on no real rest. Tremendous volume this month has propelled all stocks. It is a strong uptrend, and we don't like to bet against stocks just because they put together a good move. The trend continues to hold with churning and some distribution from time to time. It is getting tired and there is real resistance at the upper channel line on DJ30 and now NASDAQ is approaching its upper channel line as well. All of this together means that stocks have run well and are due a rest. It does not mean, as we have seen in response to each of these signals thus far, that a pullback is necessarily coming tomorrow.
Market Sentiment
VIX: 15.21; +0.21
VXN: 20.49; +0.25
VXO: 14.91; -0.36
Put/Call Ratio (CBOE): 0.60; +0.09. At the end of last week and over the weekend we noted that the put/call ratio was approaching a level that could start showing some complacency in the market as everyone is betting on the upside with calls versus puts. Tuesday many of the financial stations were picking up on this as well. Nothing wrong with that, just good reporting. The interpretation, however, was so shallow that it sent a false message.
Specifically it was noted that when the put/call ratio hits these levels it can be 'dangerous.' First, this is not a rock bottom, better look out for trouble level. When the ratio gets to 0.3 you have a problem. It is not there. It is getting closer, but it is not there. Second, there was the conclusion uttered that 'no one is hedged' and that, again, is a 'very dangerous' situation. What she was getting at is that the big institutions that cannot quickly move in and out of stocks did not have protection in the form of puts they buy to protect long positions from pullbacks or market corrections. She was suggesting that they were not buying puts and were overly optimistic, setting themselves and shareholders up for a lot of pain.
That is not entirely correct. While they have not been buying in the past few sessions, recall that on more than a couple of occasions over the past month we have noted how the put/call ratio actually rose on solid upside sessions. That is typically an incongruity because the ratio typically rises as the market falls. We surmised that, after a long run and some market churning, that institutions were in fact buying puts on their long positions to indeed hedge against a pullback. What many are failing to take into account is that there have been significant protective put positions built up over the past month. The daily action got lower, but in the bigger picture it is not scraping the bottom.
NASDAQ
Started solidly, gave it all back, and then rallied back to close just below its gap up point. Nice intraday recovery, but that candlestick pattern is not the best after just breaking higher from a short consolidation.
Stats: +7.52 points (+0.35%) to close at 2147.98
Volume: 2.596B (-0.89%). Volume, dipped but it was still very strong, third strongest session of the year.
Up Volume: 1.701B (-406M)
Down Volume: 877M (+403M)
A/D and Hi/Lo: Advancers led 1.96 to 1. 1.3:1 most of the day, but then surging as the index recovered smartly at the close.
Previous Session: Advancers led 1.61 to 1
New Highs: 584 (+149). Finally some very solid new high levels on NASDAQ.
New Lows: 6 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After gapping higher Friday led by the JNPR earnings NASDAQ was gapping higher again Monday. It gave back the move, turned negative, but then rallied back to post a decent gain on continued strong trade. The candlestick pattern is a hanging man doji, a pattern that can indicate the move is getting exhausted, but we have to view that along with the 5 day lateral consolidation immediately prior to this move. That was the first test of the breakout from the 3 month lateral consolidation, and Friday NASDAQ was breaking higher again. It has had some rest and is moving higher again on very strong volume once more. Overall a positive chart though 21% above the 200 day MVA; from 20% to 25% it starts to struggle and then pulls back. More earnings after hours were mixed, and we will get a better picture of the current breakout. It will need a pullback, but it has resisted doing so thus far.
S&P 500/NYSE
Continues the uptrend above the 10 day MVA but showing a doji on still strong volume.
Stats: +0.04 points (0%) to close at 1138.77
NYSE Volume: 1.691B (-1.29%). Lower but strong volume yet again. A bit of churning in the continued uptrend, something we have seen a few times without stalling the move. It will at some point but the uptrend remains in tact, though extended, for now.
Up Volume: 1.092B (-156M)
Down Volume: 594M (+147M)
A/D and Hi/Lo: Advancers led 1.64 to 1. Improved from the 1.3:1 it showed early on as the small and mid-caps strengthened as the session wore on.
Previous Session: Advancers led 1.36 to 1
New Highs: 558 (+100). Very nice new highs once again, improving from Friday's solid showing.
New Lows: 3 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Spun its wheels all session, never getting on track as the large caps struggled after a solid Wednesday through Friday the prior week. Not unusual for an index to struggle after a strong expiration Friday. Technically no distribution, just some high volume churning that shows some turnover as money moves out as fast as it moves in. Still in the strong uptrend above the 10 day MVA (1128), and though getting a bit extended, the money has continued to move in. Earnings did not receive a warm welcome Tuesday as they did Friday, a changeover that occurs every earnings season. It will be ready to pullback over the next week, but as of yet SP500 has defied attempts to sell the index.
DJ30
Stats: -71.85 points (-0.68%) to close at 10528.66
Volume: 224 million versus 254 million.
The blue chips could not capitalize on good earnings from UTX and others, selling back all session. DJ30 gave back up the upper channel (10,592) and closed over the 10 day MVA (10,510). It held that near support and volume fell off significantly from Thursday and Friday. That indicates no dumping of the stocks overall, but it does show the difficulty in extending the uptrend. After increasing its rate of ascent in December, it is flattening out here as it struggles with the upper channel. A pullback to the lower channel near 10,295 would be good action; thus far it has only hinted at that.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Housing starts and permits are released Wednesday along with more earnings. After hours some chip earnings were doing no favors for tech stocks as the initial reaction was to sell down some. Other areas, e.g., financial stocks, reported good results and were trading higher after hours.
The main issues for the market right now are earnings and the rally to this point. DJ30 and SP500 are extended with DJ30 struggling at resistance. NASDAQ is in that 20% to 25% range above the 200 day MVA where it starts to struggle and then pulls back. It is also nearing its first upper channel line. It is clear the market has run far and is a bit top heavy, but it has continued to shrug off occasional churning and distribution to move higher in the uptrend, and it does so on strong volume. In short, the rally has great underpinnings, and when it does pullback it will most likely be one to catch its breath and then continue higher. SP500 and DJ30 still have upside room after a breather to recharge.
We still expect some type of pullback during earnings, perhaps after this week gets logged in the books, maybe even sooner. We are not panicking about the prospect; it is an inevitable part of market action. We are taking some precautions with our stops, keeping them tightened either below near support or in some cases higher. When the earnings news becomes pass we want to be ready to close positions that look overly extended as well as option positions with nearer expirations.
Thus at this juncture we are still taking advantage of those stocks that are showing us solid breakouts ore otherwise rebounding from a breakout test. With the market still trending higher and many solid patterns providing solid moves it is hard to sit on the sidelines just because we see signals that the move could be slowing. We have seen those signs popping up for the past month and we have still made profitable investments in that period. We want to see the good breakout action to step in as that shows us a lot of buyers are interested in the move. If it is not there, better to let that one go and look for the next good mover. At this point in the run it is fine to be picky.
Support and Resistance
NASDAQ: Closed at 2147.98
Resistance: First upper channel line at 2155. 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 10 day MVA and the 18 day MVA (2100, 2067). The lower peak in the January 2002 double top (2044). The March/August up trendline (2058).
S&P 500: Closed at 1138.77
Resistance: 1150 to 1175, the early 2002 double top.
Support: The 10 day MVA and the 18 day MVA (1128, 1118). 1106 is a May 2002 top. 1100 represents some early 2001 lows. The former upper channel line at 1090. The 50 day MVA (1089).
Dow: Closed at 10,528.66
Resistance: 10,592 (upper channel line) is back over the closing price. 10,620 (March 2002 peak) starts the swath of overhead supply that runs up to 11,000.
Support: The 10 and 18 day MVA (10,510 and 10,442). 10,353 from May 2002 high. 10,295 the March 2003 up trendline. The exponential 50 day MVA (10,175).
Economic Calendar
1-21-04
Housing starts, December (8:30): 1.950M expected, 2.07M November
Building permits, December (8:30): 1.875M expected, 1.863M November
1-22-04
Initial jobless claims (8:30): 345K expected, 343K prior.
Leading economic indicators, December (10:00): 0.2% expected, 0.3% prior.
End part 1 of 3
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us stock market
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