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us stock market, trend trading stock
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1/21/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: IONA
Buy alerts issued: PPHM (bonus); CANI
Trailing stops issued: None issued
Stop alerts issued: CKSW; TMWD
MARKET SUMMARY
Techs sell on earnings but hold support as other sectors rally and prepare to rally.
JNPR set the bar for tech earnings and this week techs have been falling short of that mark. Given the blowout quarter and adamant enthusiasm on that conference call, it would be hard to top that show. Maybe Howard Dean could deliver a few conference calls and whip up the followers with that now infamous 'yahoo!' The earnings after the Wednesday close were helping, but NASDAQ was suffering heading into the Wednesday session.
NASDAQ was taking it on the chin, dropping 28 points. No panic, however. The market took it in stride as money moved from techs to financials, medical, and biotech to name a few, with barely a ripple. In an hour the tech selling was over and NASDAQ as well started back. It never made it back to positive, but it slashed 23 points off the loss, an excellent recovery. It still showed a doji on the candlestick chart, but the intraday action still suggests that buyers are ready to enter on dips.
Some view that as frightening, conjuring up visions of 1999 with the individual investor and the so-called day trader blamed for the volatility. Indeed that was a topic on one of the financial stations today: the rise of the individual investor. Gee, sounds like the Third Reich coming back from defeat in WWII. That belief about the individual investor was always an amazing claim to us; how could some day traders with trading accounts mere fractions of the billions and billions the institutional investors wielded move stocks trading $200+ per share with average volumes of 10 million $50 per session? They couldn't. It was the institutional investors, the mutual funds, pension funds and insurance companies that were breathlessly trading these shares up and down. When they got burned doing that they went to the safer, indeed guaranteed, after hours trades that gave rise to the lawsuits that they are now settling for incredible sums to keep from going to jail. All the individual investor got was the feeling that even with all of the technological innovations and open markets, once again the game was being played behind locked doors.
But we digress. Despite the rally to this point, investors (and read that as mutual funds) are moving in at any opportunity. Now that IS a bit frightening as stocks are just not really taking a breather, and that sets up steeper corrections when they occur: a pullback delayed becomes a correction in fact. Still, the market has been correcting internally with lateral moves and short pullbacks, giving just enough rest for the next move higher. Those also give stocks in other sectors time to complete their bases and make their own moves on the next rally. It is showing some churning and some distribution, but the action keeps righting itself as it has the past week.
THE ECONOMY
December housing starts at or near record levels as mortgage applications soar.
Housing starts jumped 1.7% (near a . . . 20 year high), permits jacked up 3.3%, both surging well past expectations. At the same time falling mortgage rates are sending mortgage applications soaring. Purchase applications surged 30% while refinancing applications screamed 50% higher. That sent the purchase index to a record high level. That bodes well for the future as those homes are stocked with furniture, draperies, beds, kids, etc.
Treasury Secretary Snow hints December jobs were higher than reported.
Wednesday night the opposition response to Bush's state of the union expectedly cited the massive 1K job production in December as a reason the economic policies were an 'utter failure'. Without parsing the definitions of those words it is safe to say that a 6% annual GDP, surging investment, and a surging stock market are not quite utter failures, and as sure as the sun follows night, that kind of growth will produce more jobs than expected.
Secretary Snow added some excitement along those lines Wednesday with the statement that the December jobs report may have significantly underestimated the number of jobs created. December is a tough read with seasonal adjustments as well as the aberration that month that the retail sector lost jobs. The jobs numbers did not jibe with the economic data, and maybe Snow knows something from the numbers coming in that we have yet to see. Whatever, the comments stirred some excitement in the market and helped NASDAQ make its recovery.
Oil dips and set to dip further on Saudi comments.
Oil has risen the past month on OPEC rhetoric about further cutting production in order to forestall a price drop from an oversupply later this year. Wednesday the Saudi oil minister stated that the supposed surplus had been greatly blown out of proportion and that there may be no need to cut prices at all. That helped sink prices, but the Saudis are not stupid, and they, like Warren Buffet and our friend Soros, will game the market to their advantage. They think prices are rising a bit too fast right now such that they might curtail the west's economic recovery, so they soft peddle production cuts. When it suits them they will do the opposite. Hey, it is a market out there and they control a big chunk of it.
Tax receipts surging more than thought both to individuals and to the government.
Besides being an 'utter failure,' the current economic policies that have spurred the current recovery (and we admit, there is still a long way to go with it) have created the 'largest deficits in history.' I suppose if you look in gross dollars they are the largest, but if you adjust for inflation they are not, and if you compare them as a percentage of GDP they certainly are not. It must be really cool being a politician; you can pretty much lie or at least make statements in total ignorance and no one calls you on it. Even if they do, it is usually another politician making the exception, and to most people that is the pot calling the kettle black, two trees falling in the woods that no one hears, etc.
In reality the deficit is not nearly at the levels anticipated. Recall last October we reported that the deficits were running lighter than expected. Those that did not out and out deny this were at least puzzled; tax cuts, no decrease in spending yet the deficit was smaller. What gives? Growth gives. Tax revenues grow when the economy grows. Those calculating the deficits were those that view the economy as static: take out $1 of tax revenue from the federal coffers and you have the deficit increased by $1. What that fails to account for is that $1 is put in the economy and creates new business, new technology, buys new equipment, creates a job (albeit, a low paying job). All of those activities, and it is usually a chain reaction one after the other, create taxable events and puts money into the hot, greasy palms of our fearless leaders. Thus, instead of a $500B deficit, it is showing a $340B annual rate, a mere 32% reduction from the estimates. Huge, huge revisions already and still very early in the recovery before the jobs are created that will create a huge pool of taxable income the feds can lap up.
As a percentage of the GDP, the current deficit is running 19.9%. During the 1990's it averaged 20.7%. In the Reagan first term it was 24%. Yet even in Reagan's first term when tax revenues exploded to record levels Congress spent $1.35 for every $1 of revenue brought in. Those billions of dollars in additional revenue were spent away and yet the boom those tax cuts created lasted for 20 years and ultimately set the stage for the surpluses in the late 1990's after the USSR was outspent in the arms race and failed economically. Thus the doom and damnation being spewed regarding saddling future generations with massive debt is quite overdone.
Finally, individual tax receipts in the form of tax refunds from excess withholding following the tax cuts will be big. Some are saying $20B more than the $100B originally estimated. That is a huge demand side push. Fortunately quite a bit of that will be going to small businesses that are sole proprietorships or subchapter S corporations that are basically individuals. That will continue to help the supply side catch up and hopefully get ahead of the demand side and thus keep the expansion ongoing without raising inflationary pressures.
THE MARKET
The market came out of a bit dicey consolidation two weeks back, and it is showing solid colors. The price/volume action got sloppy with distribution (higher volume on down sessions) and churning (higher volume as stocks ran in place after a long upside move). Up sessions saw lower volume. Then NASDAQ broke out and the action turned super with heavy accumulation.
Wednesday that could have turned nasty with the disappointment in tech earnings after the Tuesday close, but with money rotating in the market and not leaving, it turned out just right. Volume expanded on the NYSE that saw the SP500, small, and mid-cap indexes rally. It contracted on the NASDAQ that saw a decline. It is important to note that volume rallied as NASDAQ rallied back, more evidence of good price/volume action.
DJ30 is still fighting with its upper channel as NASDAQ and the small cap indices approach their upper channels with NASDAQ still showing some topping indications. It has been a long upside move and that cannot last forever, but nothing has been able to turn the trend back yet. Stocks may get a pop Thursday with the NASDAQ earnings after the close Wednesday, but at some point the earnings on this move will be priced in and a pullback will be needed. For now we see good patterns forming in biotech, medical, some healthcare, and smaller financials. That is a sign of money preparing to rotate again.
Market Sentiment
VIX: 14.34; -0.87
VXN: 20.71; +0.22
VXO: 14.43; -0.48
Put/Call Ratio (CBOE): 0.67; +0.07. Moving back up for the second session after hitting 0.51 last Friday. It shows there is not the dire situation that some looking at a snapshot picture would have you believe.
NASDAQ
Showing another doji below 2150, but an excellent intraday recovery.
Stats: -5.53 points (-0.26%) to close at 2142.45
Volume: 2.435B (-6.19%). Volume contracted on the selling, a very positive development given the opportunity to sell that some tried to exploit Wednesday. Volume also started up as stocks started higher in the afternoon.
Up Volume: 849M (-852M)
Down Volume: 1.539B (+662M)
A/D and Hi/Lo: Decliners led 1.11 to 1. Never got out of hand to the downside and finished roughly in line with the price.
Previous Session: Advancers led 1.96 to 1
New Highs: 396 (-188)
New Lows: 3 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ showed its second consecutive doji after continuing its breakout last Friday. The doji after a move higher is a potential sign of topping, but as seen two weeks back it can also be a resting point. That is why you always have to see a doji confirmed by the actual move; it gets you ready for a potential reversal but it is not automatic. As we have seen, a stock or index can show dojis after a run higher and simply be consolidating laterally while hanging onto its gains. That is a sign of strength as no one wants to sell; the best the profit can do is keep the advance from continuing. Once the profit takers are gone the buyers are again in the majority and back up it goes. The trend is still intact, and while we are wary of the distance of the move to this point the index has yet to show us it is rolling over. Indeed, to this point it keeps showing bullish action even when the sellers try to take it down, rallying back from the attempts.
S&P 500/NYSE
Broke higher on stronger volume as it continues its run after a brief respite last week. Impressive.
Stats: +8.85 points (+0.78%) to close at 1147.62
NYSE Volume: 1.758B (+3.96%). Excellent trade, higher than last Friday and the second highest of the months as the large caps and smaller caps tacked on more gains.
Up Volume: 1.026B (-66M)
Down Volume: 721M (+127M)
A/D and Hi/Lo: Advancers led 1.7 to 1. Solid breadth even with the smaller caps lagging a bit Wednesday. They helped keep things together Tuesday, and when they were off pace Wednesday the larger caps bucked up the breadth as the smaller caps lagged.
Previous Session: Advancers led 1.64 to 1
New Highs: 527 (-31). Still solid even as they backed off on a gain. The drop is a bit disconcerting on such a strong gain, but still a solid number.
New Lows: 2 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After a short lateral consolidation last week SP500 is going straight up yet again, still rallying over the 10 day MVA (1311). Volume was very strong as investors were buying large cap and some small cap stocks after feasting on small caps Tuesday. The index is moving toward the first top at 1150 in its late 2001, early 2002 double top. That could pose some significant resistance, but the same double top for NASDAQ barely caused that index to burp.
DJ30
Stats: +94.96 points (+0.9%) to close at 10623.62
Volume: 215M versus 224M Tuesday. Nice price gain but volume backed off as blue chips rallied to a new 52 week high.
DJ30 again crossed the upper channel line in its day to day struggle with that potential barrier (10,600). The key point is that it continues to rise all along, holding over the 18 day MVA (10,461) as it does. The lighter volume on the move higher is something to watch; volume is falling the past two sessions and if it continues the move runs out of gas and starts a test back. That will most likely be what ultimately happens after such a long and solid move. DJ30 is right at the start of the range of resistance running from 10,620 to 11,000. As previously noted, it will need a rest as it has struggled the past two weeks even as it rises; that typically signals the start of an interim top. We are not expecting a tank but again, more of a test of the up trendline (10,315).
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Jobless claims before the open and leading economic indicators at 10ET. Those will be overshadowed by earnings and earnings. Favorable after hours responses Wednesday will go against what the morning numbers show. It is a fickle time of year; business is generally up, but there are still misses or warnings, and those stocks are thoroughly pummeled. SNDK disappointed after hours and was down $12. EBAY gave upside revenue guidance and had investors slathering all over it. TSCO continued its incredible growth as the next Home Depot continues its growth.
We are expecting upside from the open, something we don't really like, particularly after this kind of run. It is hard for stocks to gap higher, run, and hold onto those moves after already putting in a strong run. There is simply less money and/or buyers willing to step in. At some point they become too few to hold the move and the sellers take over. Gaps higher are often used for that as the money already in the market uses the gap higher to unload shares to those eagerly jumping in.
Thus we are going to be cautious chasing extended stocks, but if we have a stock that has made a pullback while it is early in a breakout run, we won't just let it go. Good tests and solid rebounds are great entry points. In addition, as we noted above, there are other sectors with stocks setting up in nice patterns. If the market continues to rotate, those are set up well to make their own breakouts even as other sectors fall back on some profit taking as they prepare for their next moves as well.
Support and Resistance
NASDAQ: Closed at 2142.45
Resistance: First upper channel line at 2160. 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 (2108, 2108). The lower peak in the January 2002 double top (2044). The March/August up trendline (2060).
S&P 500: Closed at 1147.62
Resistance: 1150 to 1175, the late 2001, early 2002 double top.
Support: The 10 day MVA and the 18 day MVA (1131, 1121). 1106 is a May 2002 top. 1100 represents some early 2001 lows. The former upper channel line at 1090. The 50 day MVA (1091).
Dow: Closed at 10,623.62
Resistance: 10,600 (upper channel line) is keeping the index more or less in check. 10,620 (March 2002 peak) starts the swath of overhead supply that runs up to 11,000.
Support: The 10 and 18 day MVA (10,531 and 10,461). 10,353 from May 2002 high. 10,305 the March 2003 up trendline. The exponential 50 day MVA (10,192).
Economic Calendar
1-21-04
Housing starts, December (8:30): +1.7% (2.088M) actual, 1.950M expected, 2.054M November
Building permits, December (8:30): +3.3% (1.924M) actual, 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
trend trading stock
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