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1/28/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: BRCM (took some gain on the gap higher.
Buy alerts issued: NANO
Trailing stop alerts: Protected more gain. VOD; AMSC; TGA; YHOO; CTRA
Stop alerts: PKZ; OPLK; SNIC
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SUMMARY:
- FOMC acts as trigger to market ready to sell.
- Durables orders flat, home sales lower, but Fed seems to know GDP number.
- Uptrend test is underway on strong downside trade.
Market sells on rising volume again, using FOMC wording change as a reason.
Stocks were trying to rally again early, keeping the pattern of day-to-day volatility that in its own way was another indication the market was losing its upward momentum. They surprisingly hung in with gains up to the FOMC announcement. Nothing stellar, just a solid bounce that did not immediately turn south.
That changed about 12 seconds after the FOMC statement hit saying rates were unchanged but omitted the 'considerable period of time' phrase in favor of a statement the Fed could be 'patient in removing its policy accommodation.' The big indexes went down fast, tried the faintest of recoveries, and then continued to slide lower the remainder of the session.
Volume spiked on the selling, easily racing past the Tuesday selling volume. That is the second consecutive distribution session, i.e., where the big money sells larger quantities of stock. This was the first back-to-back distribution on the NYSE since early December, just after the market started the current run off the 50 day MVA. There is a pile of toppish attributes: day to day volatility, weakening new highs, weakening breadth on the continued gains, wildly disparate treatment of earnings, and distance above the 200 day MVA. Earnings saturation has been reached, and now the market is making the same test it has made in the prior earnings seasons during this recovery. Where it holds depends on the selling intensity. It has started out fairly intense, though if you recall the run in late 1999, there were some strong volume downside hiccups before it continued its uptrend.
THE ECONOMY
Fed provides the excuse to sell.
A change in wording left many bond, currency, and equity traders feeling again betrayed. Several Fed governors had spoken of not raising rates until 2005, and the market viewed the change as getting a step closer to raising rates. Any change would upset the market at current levels, and that is what happened Wednesday.
The Fed has to get back to a point where it can raise rates. In the statement it noted that output is expanding briskly, and the Fed could very well already have the Q4 GDP in its hands. It is not going to raise rates until jobs show a very solid recovery. As we noted last night, the Fed wants to see three months of 200K non-farm job creation before it will think about raising rates. It wants everything humming. It is not there yet, and it is going to let things run until then. At the same time, the Fed is not going to take an oath of silence (though that might not be all that bad) and then club the world markets with a rate hike. It has to have the markets ready for when it does hike rates, and again, it may know GDP in Q4 is 6% or better. Greenspan has said this type of economic growth will spur jobs, so in his mind he has to have everyone on the same page in the next 4 to 6 months in case the economy continues to race ahead and jobs start coming on strong.
Dollar likes the Fed statement.
One of the things pressuring the dollar has been the low interest rate policy. That keeps some foreign investment away from the US. With the Fed making even the slightest hint it was about to start considering the possibility of maybe raising rates at some point in the future (get the gist?) those easy plays on the dollar got a bit harder. Not as it would if the Treasury made a quick intervention, but it was a sign that down the road rates will indeed rise again. That is going to be something for currency traders to factor in now, and it helps start building a floor for the dollar.
At the same time US treasuries jumped 10 basis points on the release. The euro plunged 12 basis points as the news hit. It is interesting how it took the Fed hinting it was going to eventually raise rates in order for rates to actually move higher. Fiscal deficits were not causing rates to rise as predicted by many. It takes good economic outlook to really impact rates, not theories that have never shown any correlation to real life.
Durable goods flat in December.
Expectations were for a 2% gain, but they could only hang on with no gain after dropping 2.3% in November. Take out transportation and they fell 0.7%. Non-defense capital goods excluding aircraft (the business spending proxy), fell 0.4%. Disappointing yes, but this number bounces up and down more than an overenthusiastic cheerleader at a football game. Despite two consecutive months where the ex-transportation number was negative, the overall trend is still showing improvement, and that is the key.
THE MARKET
The Jekyll and Hyde action this week was the topping on the compote of signals the market was running out of gas on this last leg. The quick reversal on volume Tuesday set the stage, and when the Fed altered its doctrine a nervous market started selling. It was interesting to hear some television analysts talking about how the momentum players were going to get shaken up by a pullback, implying that it was the small trader moving this market lower on a strong volume surge. We just don't have that kind of clout. It is the big money institutions that move those multibillion dollar large caps down as seen Tuesday and Wednesday.
There can be no doubt the big money was selling stocks. NYSE volume shot up to its second highest level of the year. NASDAQ volume was no slouch either. Breadth had been modest lately on the upside and was modest on the Tuesday selling. It exploded to the downside Wednesday as selling was across the board. Very negative internals.
Turns down can often start this way, however, as a lot of positions are closed fast at the first sign of trouble. After that the intensity can quickly diminish and stocks check up with a nice, orderly test. Despite the heavy negative internals, many stocks are still just testing their near support in a rather ordinary way. A lot of household name large caps (e.g., AMAT, QLGC, INTC) sold on strong volume, but a lot of the smaller issues showed much more modest selling, testing their recent breaks higher and maintaining their uptrends.
It is important to note that SOX, the leader in the recent downturn, held at the 50 day MVA, showing a big hammer doji at that level. That can indicate a rebound is coming after two weeks of selling. It can mean that but with these candlestick patterns, they have to show it. Here is a key point: SOX is at the up trendline from March when this move started. It is acting somewhat as a leading indicator for the rest of the market. If it holds and recovers off the trendline, the rest of the market may just do the same. It may undercut this level, easy to do with AMAT, INTC and other big chips breaking through support, and then reverse just as the other indices test their uptrend lines. This is an interesting development, but at this point it is not something to hang your hat on.
Now some were saying buy stocks tomorrow morning, banking on two down sessions being enough to flush the system. Problem is they were two high volume selling sessions, something not seen since early December. NASDAQ is close to the up trendline, so maybe it does ratchet right back up; that would hardly be out of character. We are looking for a bit more consolidation than that, however, as SP500 still has a lot of air between it and near support. We are not expecting a major sell off, but more than a two session dip and rebound. A 3 or 4 week pullback that sees a bit lower test, an attempted rebound, and then another dip to support would clear the air and allow for another more sustained move.
Market Sentiment
VIX: 16.78; +1.43
VXN: 25.16; +2.13
VXO: 17.1; +1.78
Put/Call Ratio (CBOE): 0.85; -0.02. Still holding at the high end of the range as put buying shot right back up on the selling.
NASDAQ
Broke the 18 day MVA on a brisk volume surge is sending the techs to test the up trendline.
Stats: -38.67 points (-1.83%) to close at 2077.37
Volume: 2.331B (+6.36%). Volume surged for the second session as stocks sold. Two sessions of distribution start to raise flags, but the market can still check up at the up trendline and resume its trend.
Up Volume: 521M (0)
Down Volume: 1.737B (+76M)
A/D and Hi/Lo: Decliners led 2.65 to 1. The nastiest downside breadth in several months.
Previous Session: Decliners led 1.55 to 1
New Highs: 226 (-95)
New Lows: 6 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher in another attempt to recover from some selling as it has done time and again on this run. That faded before the Fed, but NASDAQ was still positive when the FOMC language came out. That did not last long once the announcement hit, and NASDAQ undercut the 18 day MVA (2092), heading toward the up trendline at 2075. That will be an important test but NASDAQ may very well undercut that level and test toward the 50 day MVA (2023) before working the selling out of its system.
S&P 500/NYSE
Cracked the 18 day MVA on a heavy volume surge. There is a lot of airspace between the 18 day and the next support.
Stats: +0.1 points (0%) to close at 1128.48
NYSE Volume: 1.809B (+11.24%). Strongest volume since January 8, and that was the strongest NYSE volume in 7 months. Definite selling of large caps and small caps as well.
Up Volume: 383M (-247M)
Down Volume: 1.447B (+464M)
A/D and Hi/Lo: Decliners led 2.56 to 1. With the small caps throwing on the towel as well, breadth really stunk the place up.
Previous Session: Decliners led 1.32 to 1
New Highs: 292 (-121)
New Lows: 8 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 was getting way overextended in its move, and after getting 13% over the 200 day MVA, right at the typical correction level, it is doing just that. It has cracked the 18 day MVA (1130) on strong volume, and unlike its low volume break over the 1150 mark that failed, this high volume breach opens the door lower. There is not a lot of near support for SP500 because it has rallied well. It is far above support, the nearest being in the 1100 range where the 50 day MVA lies. It may not be a straight drop, and how far it falls may depend upon NASDAQ hitting support first and holding.
DJ30
Stats: -141.55 points (-1.33%) to close at 10468.37
Volume: 247 million versus 206 million
Punched through the 18 day MVA (10,515) on a strong volume surge, finally losing the battle with the upper channel. It is heading toward the up trendline (10,375) and possibly the 50 day MVA (10,265). DJ30 never became as extended as SP500, and thus a more or less normal test of this level could yield a normal bounce up in the uptrend.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
With the Fed out of the way and earnings hitting the saturation point, the next big news for the market is Q4 GDP out Friday. We have stated we believe it will surpass expectations and come in at 6% or better. Viewing the Fed's statement Wednesday, we also believe the Fed may have some inkling the number will surpass current expectations.
Thus, after some further selling Thursday that takes NASDAQ, DJ30, and SP600 (small caps) to next support at the up trendlines or 50 day MVA, the market could be ready to rebound on some good news. That may be asking too much after such a long move to rally right back up and sustain another strong gain. What we very well may see is support hold, provide a bounce, but then see that bounce fade again for further consolidation much as in July before it has enough froth taken out to rally again.
Thus we will not necessarily be buyers in the morning. Much will depend upon how the solid stocks that we follow hold their support as they move back to test their moves. We have been taking no chances, however, with positions that start to break near support. This is a market that has started to sell, and after a long run you do not know how long or deep a consolidation will be. It may hold support and move laterally for a longer period. That is okay but can kill option positions. It may tank lower. Again, we are trying not to take any chances, instead locking in the remaining gain on many positions where we have already booked some nice profits and not letting others get out of hand.
Many will want to jump onto the downside, and if we see a good play we will take it. It is very important to remember that there is still a strong uptrend in place despite the two higher volume selling sessions, and thus you are going against the overall market trend. That does not mean we will ignore the downside, but we will not go overboard with it. We do not anticipate a really nasty downturn, so the kind of drops you want to see to make money on put plays won't be the same as fish in a barrel.
Support and Resistance
NASDAQ: Closed at 2077.37
Resistance: The second peak in the December 2001/January 2002 double top (2100). The 10 and 18 day MVA (2111, 2092) now will pose some resistance. First upper channel line at 2180. 2200 then 2300 represent tops from Q2 2001.
Support: The March/August up trendline (2075). The lower peak in the January 2002 double top (2044). The exponential 50 day MVA (2023).
S&P 500: Closed at 1128.48
Resistance: The 10 day MVA (1137). 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 18 day MVA (1130) is trying to hold on. 1106 is a May 2002 top. 1106 represents some early 2001 lows. The 50 day MVA (1100).
Dow: Closed at 10,468.37
Resistance: The 10 and 18 day MVA (10,563 and 10,515) will now act as some resistance. Upper channel line (10,648). 11,000. 11,300.
Support: 10,375 the March 2003 up trendline. 10,353 from May 2002 high. The exponential 50 day MVA (10,265).
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): 0.0% actual, 2.0% expected, -2.3% November (revised from -2.5%).
FOMC (2:15): No change in rates. Changed key wording stating Fed would remain patient with its accomodative stance.
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
End part 1 of 3
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