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us stock market, trade stock
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1/27/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: CORI
Buy alerts issued: PKI (bonus)
Trailing stop alerts: KOOL
Stop alerts: None issued
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:
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SUMMARY:
- Momentum reverses on volume as earnings run running out of gas.
- Consumer confidence stronger but jobs hold back current conditions.
- Low volume burst Monday, higher volume selling Tuesday as sellers use big up session to sell.
- Subscriber Questions
Volume climbs as stocks give back Monday gain.
Monday's burst higher was plagued by overall low volume and Tuesday the holes in the rally were exposed (low volume, flagging new highs, modest breadth) as sellers came in, forcing the market to give up most of Monday's gains. Volume jumped higher, indicating that investors were unloading some of the stocks they have been buying to this point.
It was not a major reversal and we note that price/volume action has been good before and since the market broke higher out of that short lateral move three weeks back. In short, it takes more than one day of distribution to upset an uptrend. There were still stocks breaking higher out of solid bases on strong trade. There were also stocks falling on rising volume, something they have been avoiding to this point.
We have to remember where the market is right now: a two month burst higher for SP500 and DJ30 with NASDAQ and the small caps on their own one and one-half month rallies, and right in the middle of earnings season. It has been the pattern in the uptrend the past year for stocks to run into earnings season, stall half-way into it, and then form a modest correction before continuing the uptrend. The time of the year and the length of the move to this point has kept us guarded with our positions, and we have been closing out those that are toying with breaking lower, taking the gain off the table. At the same time we look for new opportunity as we have seen in the medical sector as well as scientific and technical instruments. In that way we protect gains, protect our capital, but at the same time take advantage of any more upside this nine-lived rally has.
THE ECONOMY
Consumers more confident, but not as confident as imagined.
This was one of those reports that makes you skeptical of the whole forecasting business. Through early Monday the pros expected consumer confidence to come in at 95.1. By the time the report was released, however, expectations were adjusted higher to 98.0. Well, the number came in at 96.8, handily beating the expectations before those setting the number were caught up in some earnings results and the big move Monday.
That happens a lot with expectations: they are supposed to be based on reality, on numbers, surveys and other empirical evidence. As the time of reckoning approaches, however, expectations are influenced by another 'e' word, emotion. Expectations rise into the number even though the number is already set. Thus, there was 'disappointment' that confidence was the highest it has been since July 2002. Even the December reading was revised higher from 91.3 to 91.7, but that was an afterthought. It is a long road back from a long way down, and the surging stock market and expanding economy are paving the way. It simply takes time, and for those looking for work, it will take some jobs to really ramp up confidence.
Indeed, the present condition component was again lagging, coming in at 80.0 versus 74.3 in December. This component depends heavily on jobs according to the Conference Board, and that is keeping it lagging the expectations. Those saying that jobs were hard to get dipped to 31.4%, but that was not much down from 32.4% in December. The numbers indicate jobs are opening up, but they are doing so slowly. As for expectations, that component that looks 6 months down the road ran to 108.1 from 103.3. Consumers remain confident that the grass is greener just down the road.
Confidence lags. One thing to keep in mind is that confidence is a lagging indicator. Sure some like to say it is a leading indicator because consumers get confident and then spend after that confidence returns. That is not really the way it works in reality. Consumers say they are or are not confident and then go consume. At these levels there is no concern that consumption will suddenly dry up. It takes a reading down in the 40's or 50's to seriously impinge consumer habits.
FOMC result tomorrow.
The FOMC is getting very little play as they solemnly meet behind closed doors. The reason is because not many expect the Fed will do anything with rates. The bond market is not anticipating any rate hike for a long time. Economists that have gotten the recovery right (the very few that did) are not expecting a hike until at the earliest late in the year and maybe not until 2005. We are certain the Fed will not entertain raising rates until there are 3 or 4 months of 200K per month job creation as measured by the non-farm payrolls.
There is speculation about the statement preparing the market for that rate hike. Greenspan suggested Monday that the job market was better and that jobs would be created, but that is far from actual creation. We doubt there will be much change at all from the last statement. The Fed wants to make it very clear to business leaders and investors in America that rates are going to remain low until every facet of the economy is clicking along. Not just showing improvement, but well on the way to recovery, leaning toward levels prior to the bust. Greenspan wants that final chapter to say 'and when the great one (self-admitted) took that final stroll down the halls of the Federal Reserve, he did so with solemn satisfaction that he had, once again, rescued the economy and the country from itself.' Of course he will leave out the part about causing the problem, much as the firefighter who was the hero in putting out the fire would not tell anyone that he is the one that started it.
THE MARKET
Tuesday showed us action we have not seen in quite awhile: a lower volume jump higher followed by a high volume slap down session. Those were common in the long downtrend as buyers would venture in and sellers would use the bump higher to jump all over them. Tuesday was something like that with higher volume selling following a lower volume break higher. It was interesting that the move came after an attempt to break from a week of lateral moves on NASDAQ. The price action is what you would expect in a strong uptrend: lateral move on lower volume, then a breakout. Volume has not behaved this week and the market got spanked some Tuesday as a result.
Another thing we are watching is something mentioned recently, i.e., the up and down action day-to-day. A bit more volatile with fewer several day runs and short pullbacks. More up and down action that, while maintaining the uptrend, is showing a heightened fight between buyers and sellers, something punctuated by the action the past two sessions.
Market Sentiment
VIX: 15.35; +0.8
VXN: 23.03; +2.04
VXO: 15.32; +1
Put/Call Ratio (CBOE): 0.87; +0.29. Put buyers were eager with the selling even though the indices are still very much in their uptrends. Some downside speculation along with some protective put buying by the institutions to protect their long positions.
NASDAQ
Gapped a bit lower, failed an early bounce attempt, and closed near the 10 day MVA on a volume spike.
Stats: -37.79 points (-1.75%) to close at 2116.04
Volume: 2.191B (+11.83%). Volume jumped back above 2 billion after a low volume rally. Sellers used the rally to jump all over tech stocks.
Up Volume: 521M (-901M)
Down Volume: 1.661B (+1.14B)
A/D and Hi/Lo: Decliners led 1.55 to 1. Good to see the pace of declines were less than the advances on Monday's gain.
Previous Session: Advancers led 1.81 to 1
New Highs: 321 (-36)
New Lows: 5 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ ran 150 points from the late December breakout from its 3 month lateral consolidation. It has held the 10 day MVA (2119) the entire run. It pierced that level on the Tuesday close after tapping below the 10 day on the Friday and Monday intraday lows. This breach on higher volume is thus worth noting. NASDAQ has banged against 2150 for a week, and after a low volume move through that level Monday it failed and rolled back over. Given that we are half way through earnings season and long in a nice run we would anticipate a test of the 18 day MVA (2094) or on down to the up trendline (2072). Again, one day does not make a breakdown, but the index is struggling once again after just moving out of a lateral consolidation.
S&P 500/NYSE
Similar to NASDAQ, after forging through some resistance that kept it at bay it immediately turned and fell on sharply higher volume. That is that one-two punch that was so pernicious in the long downtrend.
Stats: -11.32 points (-0.98%) to close at 1144.05
NYSE Volume: 1.626B (+13.14%). Volume jumped back into its recent range as it spiked as the selling wore on. Again, one day of distribution does not mean a sell off is coming. The reversal of the low volume breakout, however, is an unhealthy development.
Up Volume: 630M (-388M)
Down Volume: 983M (+574M)
A/D and Hi/Lo: Decliners led 1.32 to 1. As with NASDAQ, not bad downside breadth even as the selling tempo ran higher late in the session.
Previous Session: Advancers led 1.27 to 1
New Highs: 413 (-13)
New Lows: 5 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Low volume breakouts are always a concern, and the Monday push through 1150 did not have enough backing to hold. As with NASDAQ, sellers used the break over recent resistance as an opportunity to unload positions, taking SP500 back below 1150. Again, no breakdown as it still holds its uptrend over the 10 day MVA (1139). It has overcome some distribution bouts during this move and the uptrend is strong. As with NASDAQ it has held the 10 day MVA on the close all the way up. Thus we watch how it trades around that level and what the volume is. After 150 points on this move it is a bit extended (12.7% over the 200 day MVA, close to where SP500 tends to correct) and ripe for a pullback. It was unable to give that continued move upside and then use 1150 as support, so we have to pay close attention to where it holds on this pullback. Time to be patient and see how the trend plays out.
DJ30
Stats: -92.59 points (-0.87%) to close at 10609.92
Volume: 206 million versus 186 million
Looked as if it made a more definitive break over the upper channel (10,642) Monday, but then there was that lower volume. The blue chips fell back on rising, above average trade as some big names were boxed around even after reporting good earnings. It is back below the channel line but holding over the 10 day MVA (10,520), maintaining its strong uptrend that only accelerated the past two months. It has struggled with the upper channel, but it has continued the uptrend nonetheless.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Once again there were good earnings out after the close (AMZN, BRCM), and once again, the results were mixed. After the initial continuation of the rally into earnings season, stocks are going tow different ways with earnings: they are beating and guiding higher and getting rewarded, or they are not and undergoing some selling pressure. The rising tide lifting all boats has stopped lifting them all for now. The struggle between buyers and sellers is increasing as evidenced by the action this week, but it has not been enough to break the trend, just as it has not been enough all the way up to this point.
Thus we remain wary given the more volatile action and the reversal as they are further indications that the market is struggling more to advance. There are still many earnings to hit the market, and Wednesday it will be digesting the Tuesday night and Wednesday morning batch. At this point in the run it looks as if the earnings boost is running out of steam. Our predisposition is that the market will come back to test the uptrends in the near future. The market has yet to crack, however, despite mounting indications it is losing upside momentum.
One reason it has maintained the rally is that money has rotated from sector to sector. When one gets maybe a bit frothy money moves to another sector without leaving the market. Tuesday showed some money leaving the market, not just rotating to another area. Again, one day does not set the next move, but in conjunction with the increased volatility, the struggle to break resistance, etc., it deserves caution.
We will not be totally sitting on our hands. We will protect gains and we will also look for those sectors that are still attracting money, e.g., medical related. Selling calls on long term positions is another good method of playing a pullback in an uptrend, selling at the money calls, letting the stock fall, then buying them back when it hits support and holds.
Support and Resistance
NASDAQ: Closed at 2116.04
Resistance: First upper channel line at 2177. 2200 then 2300 represent tops from Q2 2001.
Support: The 10 day MVA (2119) is trying to hold. The 18 day MVA (2094). The second peak in the December 2001/January 2002 double top (2100). The March/August up trendline (2072). The lower peak in the January 2002 double top (2044).
S&P 500: Closed at 1144.05
Resistance: 1150, the first top in early 2002, was broken but then held. Next is 1175, the high in that double top that spanned late 2001, early 2002.
Support: The 10 day MVA and the 18 day MVA (1139, 1130). 1106 is a May 2002 top. 1100 represents some early 2001 lows. The 50 day MVA (1099).
Dow: Closed at 10,609.99
Resistance: Upper channel line (10,638). 11,000. 11,300.
Support: The 10 and 18 day MVA (10,584 and 10,520). 10,375 the March 2003 up trendline. 10,353 from May 2002 high. The exponential 50 day MVA (10,256).
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
1-26-04
Existing home sales, December (10:00): +6.9% (6.47M) actual, 6.10M expected, 6.06M November.
1-27-04
Consumer confidence, January (10:00): 96.8 actual, 98.0 expected (revised from 95.1), 91.7 December (revised from 91.3).
1-28-04
Durable goods orders, December (8:30): 2.0% expected, -2.5% November.
FOMC (2:15): No change expected.
1-29-04
Employment cost index, Q4 (8:30): 0.9% expected, 1.0% Q3.
Initial jobless claims (8:30): 340K expected, 341K prior.
Help wanted index, December (10:00): 40 expected, 39 November.
1-30-04
GDP (1st), Q4 (8:30): 5.0% expected, 8.2% Q3
GDP chain deflator, Q4 (8:30): 1.3% expected, 1.6% Q3
Michigan sentiment (revised), January (9:45): 103.0 expected, 103.2
Chicago PMI, January (10:00): 62.1 expected, 59.2 December
SUBSCRIBER QUESTIONS
Q: Hello and thank you for the ways and means to get along in this market! My question is two fold. What number of shares is a "partial position?" What number is a full position? Let's say one stock is 10.00 or less and another is twenty or more. Thanks again for all of the insight, intelligence, and humor!
A: Before buying specific stock and/or options positions, we always know first how much we want to invest. A partial position can mean one-half, one-third, etc., but in most situations we look at taking a whole or half position when we move into a stock or option. That does not mean we won't invest more later even after we have completed our initial investment, but it is a good starting point. A full position would be the amount you want to put into that particular stock based on the amount of money available and considering the rest of your portfolio. For example, if you wanted to buy 500 shares of a certain stock but then decided to enter with a partial position, you could purchase 250 shares to start out, with the same going for options contracts if you were looking at options. The rest would be held until you were certain that the move you wanted the stock to make is actually occurring or, as we often do, at the first pullback after a solid break higher. The same goes for selling decisions. When a stock hits its target in an uptrending market, often we will sell half of the position, taking that gain, and then let the rest run with the market. That allows us to get even more return from the play, and we can even add to those shares later if the stock makes a good pullback and still looks ready for more. We can ride a stock higher in this way using 'other peoples' money'.
What would be instances when you might wish to enter with partial positions? Sometimes the market doesn't look so hot but a stock makes the good move and breaks out of a nice pattern. Since three-fourths of stocks follow the market, the backdrop of a lackluster day can drag on such a stock despite the good performance. However, if the breakout looks strong, taking a partial position by buying half of the intended amount can be prudent until you can be sure the stock is going to follow through as expected. Further, volume may not have reached the target. Even on a day when the market is looking great, a stock can be making a good move but volume isn't quite there yet. Perhaps the stock moves early in the day, within the first half hour, and you want to see it come back a bit then surge again on high volume. Taking a partial position gets you half in the door, even if volume waits until the next day to roll into the big numbers. Look to complete a position at the next good buy point, such as on a move up after a low-volume test of the breakout, or on a strong volume break over the next level of resistance.
This is also a good way to 'test run' some plays that look strong. You take partial positions in 2 or 3 stocks, then watch how they perform. When one shows itself as the leader, you can cash out the others and, on the next good entry point in the leader, put more money into that stock, thus focusing your investing on a leader stock as opposed to spreading it out like a mutual fund and having the laggards slow your returns.
A partial position is taken in any of those scenarios without regard to the price of the stock or option.
End part 1 of 3
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