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us stock market, top stock pick
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2/04/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: PHTN; OMCL
Trailing stops issued: IMOS
Stop alerts issued: Cleared out positions that were breaking support and not ready to make a relief bounce. EONC; PEGA; PROX; ATYT; CANI; NANX; VTSS; TTMI;
MARKET SUMMARY
Investors find earnings outlooks not supporting current prices.
Leave it to John Chambers, the Cisco CEO, to use words such as 'tentative' in his conference calls. He became notorious for interesting statements as the tech boom turned bust. Tuesday night he said that IT demand was still 'tentative', and that was all investors needed to hear. They were already waffling after a long run higher, holding at near support and attempting to recover after some higher volume selling. Chambers gave them an excuse to run for the door again, and Wednesday investors did just that. Even so, you cannot blame the move on Chambers' statement; the market has shown signs of wear after a long run, and with earnings saturation at peak levels, any hint of weakness is a reason to sell. That the hint came from Cisco only added urgency to those with fingers already poised over the sell button.
The selling marked the fifth distribution session in the last 15 trading days on NASDAQ, fourth in fifteen for SP500. Those are not terribly bad, i.e., they don't necessarily indicate a further heavy round of selling. The fact that NASDAQ resumed distribution after trying to stem the tide at its longest up trendline, however, indicates the sellers are not all flushed out. Instead of a quick snapback it looks as if the pullback is going to turn into a longer consolidation where the 10 months of gains are digested.
NASDAQ household names such as CSCO, DELL, and INTC were hammered as decliners outpaced advancing issues 3 to 1. Many leaders held their ground, but they were the few and the brave. Large cap cyclical in general fared decently but were not immune from the selling. What really hurt the NYSE was the small cap shellacking (-2.3%). Money started running out the door on many of those stocks, but stocks overall were struggling to hold support, many unable to do so in the last burst of selling to end the session.
In the end the small caps sold to the up trendline, NASDAQ broke its support, and the SOX continued its plunge below the 50 day MVA while DJ30 and SP500 held up quite well. That indicates a bit of rotation, but with the rising volume on the selling overall it is clear that money is starting to leave the market again after a 3 day respite.
THE ECONOMY
ISM services surge.
We would say the 65.7 reading was the highest in . . . 20 years, but the survey has only been around since July 1997. It was the highest reading every, however, and that is consistent with the manufacturing report. It was not aces across the board, however. New orders hit 64.9 (59.5 in December) and supplier deliveries jumped to 56.5 from 52. Those are good indications. Orders backlog, prices paid, and employment all fell. They are still expanding (above 50), but eased back, an indication that there is not an across the board surge in demand.
It is easy to nitpick the numbers, but you cannot let the pieces swallow the whole. The report was the strongest on record. All sub-indexes were above 50 indicating expansion. When the market is in a selling mood as it currently everyone likes to pick apart the reports and find reasons to say things are not that good. That is fine. The market needs a rest and if they want to use good economic data as a reason to sell, that is no problem because the underlying reason for the stock market rise is still in place. Once the excess is worked the solid foundation is still there.
December factory orders blow past expectations.
Expectations were for a 0.2% gain following November's 0.9% loss. We said back then that this number was as volatile as the March wind, and sure enough it more than reversed the loss. There was strength across the board with non-durables posting a 2% rise and machinery jumping 3.5%. As a result, the inventory to shipments ration fell to another record low of 1.26 months from 1.28 months. At some point that will lead to more production, though the new inventory management systems (smart chips, etc.) make the 'just in time' method from the late 1990's look slow and ponderous. Thus businesses can live with lower inventory levels and still satisfy (at least for the most part) their customers. On the year factory orders rose 3.9% versus a 1.9% rise in 2002.
THE MARKET
Techs received an old fashioned butt kicking, gapping below the near trendline, selling through the exponential 50 day MVA and even the simple 50 day MVA right at the close. The leaders in 2003 (tech, chips, small caps) were carved up. SOX sold further below the 50 day MVA while the SP600 (small caps) thudded to the up trendline. At the same time the SP500 held up fairly well as did DJ30, the latter easily holding over its up trendline. SP500 looks to be weakening here, however, with volume spiking and a failed attempt to clear the 18 and 10 day MVA. We are watching it for a downside play.
With distribution returning to the market and NASDAQ gapping lower and slicing through support, the potential for a more drawn out consolidation rises. Extraneous events could cut it short such as a super jobs report, but even with that the market has run a long way and is due for a consolidation. As a market makes its first fall back into a longer consolidation the selling is typically on stronger volume. That is normal. What needs to happen after that first downdraft (which is still underway given the resumption of the selling volume and NASDAQ breaching support) is for volume to fade and the index to start moving laterally.
We want to see stocks do the same thing. Then we watch for the day to day price/volume action and look for rising volume on up sessions and lower volume on down sessions. This can be quiet and boring, and it often gets commentators and investors impatient. They start talking about how the market is running out of steam and preparing for a further sell off, etc. We heard this in March and April 2003, but at the same time we saw excellent price/volume action and stocks setting up very nice patterns with good accumulation readings. Thus we remained positive, looking for the breakout move to come. When it did we were all over it. One of the confirmations for the move to us was TSCO's breakout from a reverse head and shoulders base: a leader in a good accumulation pattern making a strong breakout is very good confirmation that the market is ready to do the same.
Sure enough that good price/volume action and quiet consolidation was not the rally running out of steam or dying as some put it, just a good rest after a big blast off of the October low. Right now the market needs this consolidation after a long, strong run for 10 months. Right now everyone is going to say it is a short correction that is needed. It is indeed needed, but the consensus says it is needed so there is more work to be done. That means before it is over, however, we will see the doubt creep in as the pullback gets a bit longer and a bit deeper than expected. When the grousing starts, that is when it is time to start looking for a better move.
Market Sentiment
VIX: 17.87; +0.53
VXN: 26.65; +0.35
VXO: 17.58; +0.52
Put/Call Ratio (CBOE): 0.81; +0.11. Strong but not spiking over 1.0 yet on some heavy selling. Still more work to be done.
NASDAQ
Broke through all near support, cracking the simple 50 day MVA on the close as volume once again raced higher. The correction is back on.
Stats: -52.07 points (-2.52%) to close at 2014.14
Volume: 2.282B (+22.53%). Volume spiked as NASDAQ gapped lower and cut support levels right and left. Another day of distribution as the selling renews. Volume could not gain a foothold as NASDAQ struggled to hold the trendline, and the collapse on volume indicates the selling still has some room to go.
Up Volume: 296M (-423M)
Down Volume: 1.959B (+898M)
A/D and Hi/Lo: Decliners led 3.46 to 1. Negative breadth is expanding across the board, showing its strongest reading in months. At some point that reaches a saturation point as with the put/call ratio. Not there yet.
Previous Session: Decliners led 1.16 to 1
New Highs: 111 (-31)
New Lows: 10 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The selling resumed in earnest with NASDAQ breaking key support levels on volume. After three days of lateral movement on low volume as it tried to consolidate and hold the uptrend the dam broke and NASDAQ continued the first leg of its consolidation stage after a 10 month rally. It has not totally broken the 50 day MVA, and after a week of sharp selling (down 139 points, 6.5%) it will provide a reflex bounce. Again, NASDAQ has not completely broken the simple 50 day MVA (2029), and thus a rebound from near this level is likely. With the jobs report Friday, we could see the rebound then. We do not think that will be the end of the consolidation though it may very well roughly set the bottom.
S&P 500/NYSE
Struggling below the 18 day MVA as volume rises. It looks ready to follow NASDAQ lower toward the 50 day MVA, but it has not given up all support.
Stats: +0.02 points (0%) to close at 1126.52
NYSE Volume: 1.622B (+9.72%). Volume jumped back up as SP500 spun its wheels below the 18 day MVA.
Up Volume: 422M (-223M)
Down Volume: 1.182B (+358M)
A/D and Hi/Lo: Decliners led 2.64 to 1. The small cap selling turned breadth decidedly negative, eroding the strength from the NYSE.
Previous Session: Advancers led 1.05 to 1
New Highs: 91 (-133)
New Lows: 12 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A relatively small loss for the index, and it held the 1125 level that has provided support as it has moved laterally the past week. This is the mid-level of the early January week long lateral move as well, hence the support trying to hold. The higher volume indicates churning (high turnover) where stock is unloaded at high rates. Of course, it is also being bought as well. Thus SP500 has not definitively shown a breakdown, but with NASDAQ and the small caps heading lower on volume it will be very difficult for the large caps to avoid joining the consolidation's next leg down toward the 50 day MVA (1106). SP500 has still shed little of its strong gain, and as noted before, it has limited upside from here without a further consolidation.
DJ30
Holding its own, almost oblivious to the NASDAQ selling (INTC had a rough session), DJ30 continues to work laterally just below the 18 day MVA (10,505) as the up trendline rises to meet it (10,425). When that trendline meets the index, that could send it higher. While NASDAQ acts as a drag on other indexes, particularly SP500, DJ30 acts as a buoy for SP500. The blue chips churned on stronger volume Wednesday as well, but they are not showing the propensity to sell off, at least not as a whole right now. There are stocks such as MMM, INTC, and IP that are looking ugly and will pressure DJ30. Thus if NASDAQ and SP500 drop further, DJ30 may still hold up, but that would delay any break higher off the trendline.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Early in the week we discussed how the jobs report was starting to loom larger. With the indexes selling ahead of the number we might see a relief bounce if the jobs report is a strong one (we have heard that before, eh?). We doubt a strong report would turn the correction into a new rally, but provide a relief move that you often see after the initial sell off as stocks start to consolidate a long move. If it is totally blowout (300K or so), then it could start a rally. The way this pullback is taking shape we expect more than just a test of the 50 day MVA.
We opened some downside positions today and will be looking for more if the opportunity arises. That opportunity will most likely present itself on that relief bounce we anticipate. We have been trimming positions the past week, and on any relief bounce we will be doing the same. The big move down to this point does not leave a lot of stocks in a good downside entry point (though the OEX still has yet to make its move downside). A relief bounce is characterized by lower volume and/or a failure at resistance. If we see this along with stocks making a lower volume rebound, we get ready to move in to the downside when stocks hit resistance and show signals such as a close off the high or a doji.
Until then we remain patient and pick the spots. Some decent earnings reports after hours may help buck things up Thursday, but we will be extremely wary of any early move higher. The better action from the long side of the equation would be another reach lower to start and then a rebound to the close. With the jobs report out Friday we can expect some shorts to try to cover ahead of the number given the plunge to this point. There is that chance that the jobs report will be strong and December revised sharply higher; that will get the shorts to cover and help a rebound ahead of the number. It may not be strong, but it may stabilize the selling. After that rally we will be ready for downside positions in the event the jobs number disappoints or after a good report sends stocks higher but then runs out of gas.
Support and Resistance
NASDAQ: Closed at 2014.14
Resistance: The exponential 50 day MVA (2029). The second up trendline (2059). The 10 and 18 day MVA (2073, 2075). The March/August up trendline at roughly 2089. The January high at 2150. 2200 then 2300 represent tops from Q2 2001.
Support: The simple 50 day MVA (2017) has not been totally broken. The March/December up trendline (2021) is also still in range. Below this the November and December peaks at 1975 to 1990.
S&P 500: Closed at 1126.52
Resistance: The 18 day MVA (1131). The 10 day MVA (1134). 1150, the first top in early 2002. Next is 1175, the high in that double top that spanned late 2001, early 2002.
Support: 1125 is some minor support. 1106 is a May 2002 top. 1106 represents some early 2001 lows. The 50 day MVA (1106) is the key point.
Dow: Closed at 10,470.74
Resistance: The 18 day MVA (10,505). The 10 day MVA (10,518). Upper channel line (10,692). 11,000. 11,300.
Support: 10,425 is the March 2003 up trendline. 10,353 from May 2002 high. The exponential 50 day MVA (10,306).
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% actual, 0.2% expected, 0.3% November (revised from 0.5%).
Personal Spending, December (8:30): 0.4% actual, 0.4% expected, 0.5% November (revised from 0.4%).
Construction spending, December (10:00): 0.4% actual, 0.8% expected, 0.5% November (revised from 1.2%).
ISM Index, January (10:00): 63.6 actual, 64.0 expected, 63.4 December.
2-04-04
ISM Services, January (10:00): 65.7 actual, 60.0 expected, 58.0 December.
Factory orders, December (10:00): 1.1% actual, 0.2% expected, -0.9% November (revised from -1.4%).
2-05-04
Productivity, Q4 (8:30): 3.0% expected, 9.4% Q4.
Initial jobless claims (8:30): 340K expected, 342K prior.
2-06-04
Non-farm payrolls, January (8:30): 165K 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): $7.3B expected, $4.0B November.
End part 1 of 3
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us stock market
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