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world stock market, us stock market
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1/31/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued
Buy alerts issued: TKLC; AVGN; SMTS
Trailing stops issued: None issued
Stop alerts issued: PPHM
GDP gives no reason to continue Thursday reversal.
Shorts had covered and buyers also moved in Thursday after two and one-half days of heavy selling. It did not hurt that Q4 GDP was out in the morning and expectations were that it would beat expectations. The market rallied back on solid volume having held near support.
GDP was 1% below expectations. That squelched the pre-market action. Stocks opened lower but rallied positive as Michigan sentiment topped expectations and the Chicago PMI (manufacturing survey) trounced the consensus. After all, the Fed was going to be patient, and as GDP was not bursting through the door, maybe the change in statement was not that bad. It wasn't that good either, however, as the pop ran out of gas and stocks drifted laterally most of the session.
A late bump kept stocks basically flat on the close, holding near support on low volume. The late move higher, fighting off some sellers was not bad action. After the Thursday reversal, however, it was not really good action. Stocks sold hard, had a relief bounce Thursday afternoon, and then lost their way Friday. There are still many good tech and small cap patterns that have tested their breakouts and are primed to move back up, but chronic overextension still exists in the large caps.
The month might have gone out quietly, but SP500 managed to close the month with a 20 point gain. Since 1950, if the SP500 can close out January with a gain, 91% of the time the year ends positive as well. Add onto that election year rallies and continuing economic stimulus in the form of business investment incentives and increased monthly take home pay from the marginal tax rate cuts and you have the recipe for another up year. Before that, however, we have to deal with the current pullback.
THE ECONOMY
Q4 GDP a solid 4%, but when the whisper tops 6%, the market feels it.
The last 6 months the economy did grow at a 6% average rate, really humming as the entire year saw 3.1% growth. That shows how slow the year started when the Iraq war was the focus. That was still gangbusters compared to the 2.2% rate for 2002. Still, the slowdown was more than anticipated. Personal consumption (the consumer) rose just 2.6%, lower than the 3% expected (6.9% in Q3), but still solid. Moreover, the last two weeks of the year saw a retail jump, and that is not included in the first GDP report. Thus that will rise.
The big culprit was inventories. The continued record low stock to sales ratio has been foretelling a jump in production to build up inventories. Burned by the massive inventory overhang in 2000, companies have been running extremely efficiently (inventory management today makes the 'just in time' inventories of 1999 look as if companies were using stone knives and bear skins back then), producing only what they have to produce in order to meet demand. Just as they have held off hiring workers, they have held off ramping up production beyond what is necessary. It is a mindset that crosses all sectors of business. Even with an excellent rebound in business spending (+6.9% in Q4 and +12.8% in Q3) business rebound, it could be better if businesses let go and started producing. They have yet to let go of the ledge as we noted in the Thursday report.
So, inventories rose just $6.1B in the quarter when expectations were for a $19B expansion. That sliced off almost the entire 1% below expectations. The lower personal consumption and the drop in real final sales (+3.4% versus 8.3% in Q3) kept it from reaching the whisper number at 6%. All in all it was a solid growth quarter, slowing after the blistering Q3 burst. Other economic indicators suggest the expansion continues, and the tax refunds in Q1 will help pump up personal spending.
Chicago purchasing managers index surges.
Midwest manufacturing jumped to 65.9 in January from 61.2 in December, the highest reading since July 1994. That blew past expectations (62.0) and put investors in a better mood. Manufacturing continues to expand, led by the usual culprits: new orders rose to 69.7, but the employment index fell to 48.3 from 49.6. Same story since the start of the recovery: solid business improvement but no hiring as of yet. As noted Thursday, the employment indicators (overtime, wages, continuing claims) are not showing the big expansion that indicates strong recovery.
Michigan sentiment jumps.
This is the first iteration for the month, and we were hesitant to even report it because it has been so far off the prior two months. It jumped to 103.8 from 92.6 (103 expected), the highest since 107.6 in November 2000. Current conditions, lagging still in the Conference Board's report last week, surged to 109.5 from 97, the highest since 110.5 in December 2000. Expectations were solid at 100.1, jumping from 89.8 in December. Looks very impressive, but it needs to follow through on the later revision.
Summary: Economic growth is solid; what we need is to limit spending.
In sum, while there were expectations of stronger Q4 growth, the results were not bad at all. Investors were expecting the 'shock and awe' that the Q3 number delivered, and thus 4% seemed meager. It was not. Indeed, GDP will be revised higher in the next two rounds as the late December numbers are put in: the burst of spending late in the year by both the consumer in a late holiday spree and businesses rushing to take advantage of tax incentives before the end of the year. Manufacturing continues to spell a brighter story after years of decline.
We are seeing the same cycle of concern that rises about the economy every 6 months or so when things don't just blow out to the upside. A bit of worry sets in and investors, economists, and about anyone else who thinks about the economy start imagining all kinds of problems lurking in the dark. The deficit is one of those worries that seem to be a real problem but just is a symptom, not the root problem. Moreover, it is not that critical at this point.
As we have noted the past week, the deficit as a percentage of GDP is less than the average of the 1990's when we were supposedly in economic nirvana. Thus, not the horrific problem it is made out to be in terms of relative size. More importantly, it is only a symptom of ever-increasing spending. If spending is held below the rate of economic growth, even if only marginally, the deficit starts shrinking. If it is tied to an social security modification where every dollar less spent by the federal government goes directly back to (or actually, never leaves) taxpayer retirement accounts, you accomplish reducing the need to fund a huge social security 'trust fund' (the worst euphemism ever invented) and reduce government spending simultaneously. In this scenario you avoid overspending in the good times and have a better buffer for the bad times by avoiding that spending spree. It is total common sense, but there are many in Congress that truly believe that a huge federal government that oversteps the Constitution is constitutional. They are post-1965 products and all they know are entitlements created in areas reserved to the states.
THE MARKET
Depending upon what index you look at, the market takes on different character. NASDAQ has made a test of the breakout from its 2.5 month lateral consolidation. Though volume accelerated on the downside move, that happens in long uptrends, and it still managed to hold its up trendline as it made the test. SP500 is just coming off a spurt higher and though holding at the 18 day MVA, it has not come close to working off the froth from the rapid ascent. DJ30 is just coming off a month long struggle with the upper channel line in its uptrend; it still has some more to test before it is really ready to continue its move.
The action Friday and the lethargy in the large cap indexes make the Thursday rebound look more like a relief bounce from the selling than an important turn back up. There are a lot of tired patterns, but in the tech sector and even the small cap stocks there are lots of very nice pullbacks to support that are testing their breakout. NASDAQ is in a position to make a move. The question is whether it can lead the rest of the market out of their less than inspiring patterns.
There was some money pulled out of stocks Tuesday, Wednesday and early Thursday as opposed to rotating as it has done to this point. Again, that is not the end of the rally, but it looks as if SP500 has to correct some more. On any bounce higher we need to watch volume on the indexes and individual stocks; if it does not jump back up and thus show accumulation, the market is setting up for another further pullback.
Market Sentiment
VIX: 16.63; -0.51
VXN: 25.06; -0.14
VXO: 17.05; -0.06
Put/Call Ratio (CBOE): 0.81; +0.01. Hanging in there at the high end of the range, making a quick rebound every time it comes close to 0.5. The more that hedge against the downside, the better it is for the market because it shows there is real concern about its ability to continue the move higher.
NASDAQ
Held the uptrend again, showing a tight doji on lower volume after the hard selling earlier in the week.
Stats: -2.08 points (-0.1%) to close at 2066.15
Volume: 1.941B (-26.58%). Volume tanked as NASDAQ held its ground at the trendline after a high volume bounce Thursday. Now we see if volume jumps on the way back up.
Up Volume: 958M (+148M)
Down Volume: 950M (-874M). Up to down volume was a standoff.
A/D and Hi/Lo: Advancers led 1.17 to 1. Advancing issues recovered to post a modest rise, a decent sign given the overall market.
Previous Session: Decliners led 1.87 to 1
New Highs: 129 (+30)
New Lows: 5 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ has just about made a full test of the breakout from the October to December consolidation. Volume jacked up on the start of the fall, surging after the low volume rally Monday. It surged Thursday as NASDAQ tapped the lower up trendline (2050) and rebounded furiously. Friday a doji over that up trendline suggests that NASDAQ may try to make a stand here and continue the breakout move. It could still slide back to the 50 day MVA (2026) for a bit deeper test, but it if it is going to resume the move, here at the trendline is where it should do it. NASDAQ looks good as do many of its stocks that have made similar pullbacks to test the breakout. But for SP500 needing more consolidation, we would be much more excited about the near term prospects.
S&P 500/NYSE
Rebounded Thursday but stalled Friday below the 10 day MVA. A sharp drop, but not much taken out of the run yet.
Stats: -2.98 points (-0.26%) to close at 1131.13
NYSE Volume: 1.639B (-14.73%). Volume fell off as the index lost ground. At least no distribution, but hardly an impressive day given the Thursday volume rebound.
Up Volume: 866M (+65M)
Down Volume: 744M (-338M)
A/D and Hi/Lo: Advancers led 1.1 to 1
Previous Session: Decliners led 1.74 to 1
New Highs: 140 (+23)
New Lows: 5 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Still 11% above its 200 day MVA. SP500 historically struggles when it hits 10% above the 200 day, and it starts to correct when it hits 15%. It fell just short of 15% at the height of the run Monday and then started lower on spiking volume. It checked up at no real support level Thursday, but the move stalled below the 10 day MVA (1136) Friday. It is not the picture of strength at the moment, not surprising as it needs more of a pullback after accelerating the pace of the move higher the past month. It is holding at some support form the lateral consolidation at 1125 to start the month, but that is tenuous.
DJ30
DJ30 falls in between NASDAQ and SP500 with respect to its technical position. It tested its upper channel (10,665) for almost a month and started a higher volume fall Wednesday. It is already dipping near the up trendline (10,380), and a test of that level or even down to the 50 day MVA (10,283) is typical after a run to the top of the channel. It has been a long run, it needs a rest, and when it gets there we see if it jumps off of that support or takes a longer consolidation.
Stats: -22.22 points (-0.21%) to close at 10488.07
Volume: 209 million versus 274 million Thursday
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Earnings are winding down as economic data revs up. Next week there are heavyweights. Personal spending and income, ISM (national manufacturing), factory orders, productivity, and the all-important employment report.
The market may not realize it, but it is in the best of all worlds. The economy is expanding, yet there is enough to keep the Fed and thus interest rates on the low for maybe not a considerable period, but for a long time. As we have said, the Fed is not going to consider raising rates until it sees 3 or so months of big job creation. Moreover, it can raise rates and still be behind the real rate of interest, thus not pressuring equities at all. The reaction this past week to the Fed statement was knee jerk and did not factor this in. Moreover, we don't buy into the argument that the deficit is going to sink the economy. If pro-growth policies are maintained, Bush sticks to his pledge to reduce spending and starts some social security reform along the lines of personal savings accounts, the deficit will shrink. It may not turn to surplus, but it will be much lower than historical rates and that puts it well below any level that would raise alarm or cause foreign investors to turn away.
That is big picture, and that indicates that the market still has a good year ahead of it. Near term it has to consolidate the gains in SP500 and finish the blue chip consolidation. NASDAQ looks ready to lead higher. Indeed, money can flow back into techs while the large caps test back and consolidate. That is the rotation we have discussed, and while money was taken out of some stocks last week, more is still flowing into mutual funds ($14.7B in December).
There are many plays that have made tests of near support, and many others that are holding support at a lower level. They appear ready to make their rebounds after the mid-earnings season pullback that has each earnings season the past year. We are going to be looking at those stocks making the tests of breakouts for rising volume rebounds; that shows us that buyers are returning to them in number, thus 'proving up' the breakout. If they are moving well, we will move in.
Volume will be the key on any rebound. We have a feeling we are going to see a lower volume bounce from SP500 and perhaps DJ30 that could lead to a second test. That has occurred in past earnings seasons, and if volume does not rally on a bounce that is the more likely scenario. As for NASDAQ, it has made a nice breakout and test. It is poised to head back up if the economic data comes in solid. The week starts off with personal spending and the ISM, and that could start NASDAQ higher. There may be some anticipation ahead of the Friday jobs report that helps push stocks as well.
Support and Resistance
NASDAQ: Closed at 2066.15
Resistance: The March/August up trendline at roughly 2080. The 18 day MVA (2087). The 10 day MVA (2097). The second peak in the December 2001/January 2002 double top (2100). First upper channel line at 2188. 2200 then 2300 represent tops from Q2 2001.
Support: The lower peak in the January 2002 double top (2044). The secondary up trendline (2050). The exponential 50 day MVA (2007).
S&P 500: Closed at 1131.13
Resistance: The 10 day MVA (1136). 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). 1106 is a May 2002 top. 1106 represents some early 2001 lows. The 50 day MVA (1103).
Dow: Closed at 10,488
Resistance: The 18 day MVA (10,511). The 10 day MVA (10,541). Upper channel line (10,658). 11,000. 11,300.
Support: 10,380 is the March 2003 up trendline. 10,353 from May 2002 high. The exponential 50 day MVA (10,283).
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
2-02-04
Personal Income, December (8:30): 0.2% expected, 0.5% November.
Personal Spending, December (8:30): 0.5% expected, 0.4% November.
Construction spending, December (10:00): 0.8% expected, 1.2% November.
ISM Index, January (10:00): 64.0 expected, 63.4 December.
2-04-04
ISM Services, January (10:00): 60.0 expected, 58.0 December.
Factory orders, December (10:00): 0.3% expected, -1.4% November.
2-05-04
Productivity, Q4 (8:30): 3.4% expected, 9.4% Q4.
Initial jobless claims (8:30): 342K expected, 342K prior.
2-06-04
Non-farm payrolls, January (8:30): 180K expected, 1K December.
Unemployment rate, January (8:30): 5.7% expected, 5.7% December.
Hourly earnings, January (8:30): 0.2% expected, 0.2% December.
Average workweek, January (8:30): 33.8 expected, 33.7 December
Consumer Credit, December (3:00): $6.5B expected, $4.0B November.
SUBSCRIBER QUESTIONS
Q: I stopped by this evening for a social visit with a CFO of a small well
funded high tech startup company. . . He said the jobs are moving overseas through displacement, and there simply is no reason to hire locally and have large staff anymore--even the managers can be hired overseas. He said the man on the street has no idea of the true situation. So those who think the jobs are suddenly going to return as they were
previously simply do not understand the true effects of globalization upon
our economy.
A: Silicon Valley was massively overbuilt as often happens in the boom of a new area of industry. We all recall the talk of a major shakeout to come, but at the time the faucet was on full blast and no one thought it would ever be turned off. After it is turned off and the bust comes, the same areas that boomed never return in the first recovery because companies do exactly what they are doing right now, e.g., putting off any hiring, using the lowest cost alternatives, etc. Those jobs are gone because the boom is over and a large percentage of those companies vying to be the ones to capture the business and establish themselves were, of course, unable to do so. It is truly survival of the fittest, smartest, fastest, and luckiest. Again, those jobs that were part of the blitzkrieg to take advantage of the new industries springing up won't return because they were in the excess to begin with. A new industry or a new boom in a mature industry caused by new circumstances begets excess as it explores its limitations.
Everyone points to the most recent such bust in technology. There was big bust in the oil and gas sector in the 1980's after the energy crisis of the 1970's set off an unnatural explosion in oil and gas exploration. The industry almost collapsed with most small concerns that exploded onto the scene during the boom ending in bankruptcy and the large companies having to totally restructure. Even the big boys saw their numbers decline in the consolidations. Now much of the action is overseas where US and foreign workers are used. The industry has never been the same. It had to change to meet the changing world realities.
When the bust comes those jobs are lost, and if it is accompanies by a general recession, jobs in other industries are lost as well. That is, of course, just what happened. It takes the shakeout of the bust to get a lot of smaller companies created just as in the 1980's after the terrible 1970's killed off many small businesses (and some large ones as well). There were no jobs back then and a lot of former employees and new graduates (some not even graduates), responding to the tax incentives, started their own companies. This created new companies with new ideas (doing it better than the old employer that canned them because it got too fat and could not provide the service or products new clients demanded), and from those companies the new industries and jobs arose. GE, IP, and the like don't create most of the jobs in the country. It is the smaller businesses in the growing industries that create the truly new jobs.
End part 1 of 2
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