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us stock market, trading system
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2/12/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Thursday: TASR
Buy alerts issued: MVIS;
Trailing stops issued: None issued
Stop alerts issued: SPIL
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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market suffers hangover following Wednesday solid gain.
- Retail sales not bad, business inventories up but sales up stronger.
- Greenspan, in twilight of his Fed career, returns to his free market, less government roots. Why did he ever leave them?
- Low volume fade as market takes a breather after high volume gain.
- Subscriber Questions
Two days up, one day back.
That has been the pattern since coming off the most recent, small pullback. Of course, it is only had two cycles and has been just a week in existence, but with solid price/volume action returning, the pattern has strength. Thursday was just a day of rest after large caps partied Wednesday on high volume as the volume declined and the indexes held near support. It was a lot like a long weekend where you party too much on the first night and are not up to hitting it again the next day. Wednesday the market took Greenspan's advice in his testimony to the House, and was exuberant. Thursday it was nursing a hangover and was unable to capitalize on even better news from the Fed chairman. That is okay. While the market may have been too tired to respond, the future ramifications of what Greenspan said about taxes and the size of government are very market friendly.
THE ECONOMY
January retail sales solid but for autos.
Expectations were for a flat overall number and a 0.5% gain without autos. Auto sales were very weak, and that dragged the overall number down (-0.3%). Take out autos (-3.9% after rising 0.2% in December), and sales were as strong as same store sales indicated, rising 0.9%. The auto sector decline is nothing surprising. We saw auto sales yo-yo month to month even as auto sales were posting record after record. All in all, very solid for a normally very quiet month.
It is not all strawberries and cream of course. Retail sales include all sales and it is measured in dollars not units. With energy prices back on the rise and some very cold weather, energy and gasoline usage and price increases padded the sales figure (e.g., gasoline +1.7%). Those are not the kind of sales increases that are necessarily attributable to a robust economy. If it is cold you have to stay warm; buying extra heating oil or natural gas does not add much to economic consumption, at least the type that drives the economy.
Again, it was still a good report. General merchandise stores saw sales rise 1% versus December's 0.3% gain. Clothing sales rose 2.9% compared to a 0.2% December decline. December was a holiday month and sales were strong in the last two weeks of that month. That January was able to top those numbers is an indication that consumption is not going into winter hibernation.
Business inventories rise again, sales rise higher.
December inventories rose 0.3% on top of a revised 0.4% gain in November. That was in line with expectations and in line with the wholesale inventories previously reported. Sales rose 0.9%. Retail inventories (one sub-index in the report) rose 0.3% after a 0.8% gain in November.
It is clear that businesses are in the process of building inventories, but it is not yet exploding and they are using every technology available to keep inventories as thin as possible. It is a very real holdover from the late 1990's when companies produced as much as possible only to see the market run dry almost overnight. With sales running 0.9%, inventories are still being sold faster than replaced, putting the stock to sales ratio at another record low (1.34 months). That continues to point to healthy growth in the supply side of the economy, the piece that was missing from 2000 to 2002.
Greenspan clearly spells out his free market, smaller government ideals in most likely his last post Humphrey-Hawkins address.
Greenspan gave phase two of the son of Humphrey-Hawkins testimony Thursday. It was basically the same as the Wednesday version. The question and answer, however, was much more informative than usual. As we anticipated Tuesday, political agendas surfaced as our leaders finally got around to plying Greenspan with questions aimed at reaping campaign fodder. That old saying be careful what you ask for was never truer as some found out.
One democratic senator asked Greenspan to state his opinion on the plan to make the tax cuts permanent in light of the 'exploding' deficits the senator claimed would result. Greenspan unequivocally stated that he preferred extending the tax cuts. Any deficits should be handled by reducing spending. That was his simple, clear, and main theme. When one senator quoted a totally 'unbiased' New York Times article that if the tax cuts were extended deficits would be basically apocalyptic even if discretionary spending were cut completely, Greenspan stated we had to "re-look at entitlement spending," noting that the "arithmetic does not work." He was taking dead aim at social security and Medicare, but the rationale applies to all claimed entitlement programs. When pressed on how 'difficult' it would be to this, Greenspan assured the senators he was aware of this, but it was absolutely imperative that we do just that.
Hallelujah. We have been saying that for years: when social security was originally designed you had to live 3 years beyond the average to collect anything. It was a stipend, a bonus if you lived past the average lifespan. Now the average lifespan is 9 years beyond the retirement age. Yes, the math does not work. That is just one example of how these programs have not kept up with reality. What Greenspan is saying is that the entitlement system is not working in the current form and CANNOT work EVEN WITH an economy working at 100% capacity 100% of the time. He noted that "once you decide to spend on a program, it is very difficult to reverse them," and stated again he is in favor of sunset provisions for any program. If it is a good program that has the favor of the citizens, it will be renewed. If not, it will be canned. At a minimum it requires the darn thing to be reviewed to see if it should be renewed. Think that is not important? Remember the telecom tax (it was originally on telegraphs but the name was changed when the technology changed) repealed in the late 1990's (part of Clinton's tax 'reform') that was passed as a 'temporary' measure to fund the Spanish-American war? When it comes to federal spending, there is nothing temporary. It is truly amazing how tax cuts that promote economic growth are sunset, but the most arcane, pork barrel spending is automatically rolled over year after year. That entitlement programs rife with fraud and waste are re-upped again and again without review is disgusting. As a taxpayer I am sickened by this cavalier waste of our dollars and the use of the hard workers that produce economic success as the funding mechanism for this waste.
Another very critical area that received little comment: Greenspan espoused a very supply side argument when arguing for spending cuts versus ending the current tax cuts or raising future taxes. For the first time since we have listened to Greenspan he stated that you cannot rely on tax hikes to bail you out of every revenue problem. If spending is too much for the economy to bear (as he is saying it is now), raising taxes in good times or in bad will not solve the problem because it will fail to generate the necessary revenue. That is the very basis of the Laffer Curve: as you raise taxes, there is a critical level that once you cross, tax revenues actually decline even as rates rise. The reason is that investment declines as you raise rates beyond that level because the reward does not justify the risk combined with the extra taxes.
To us the critical issues are spending and taxation. The jobs data that senators haggled over is a subset of those. The foreign debt and current account that were bandied about as well are also a subset of those. Greenspan, in the twilight of his career, has finally come out and once again embraced those principles that he was known for at the beginning of his career: removing restraints on markets to let allow them to most efficiently allocate resources. If only he had stuck to those principles in the late 1990's we would be much better off.
THE MARKET
Stocks could not muster another gain after two sessions of improvement. As volume backed off, breadth was modestly lower, and very few stocks broke down, the action was not bad. No distribution, no bad breakdowns, just a pullback after a big day.
That raises the question as to whether the Wednesday action was a one-shot wonder in what is otherwise a consolidation, something of a short covering bonanza. Short covering is often characterized by a surge in volume, certainly an attribute Wednesday. NASDAQ was up, but the strong volume was not matched by the price gains much as the big price surge last Friday was not matched by strong volume. Small caps lagged as well on that session. In short, the leaders were lagging on the big jump higher. That suggests that there may have been short covering driving the large caps higher that have been underperforming led the charge.
Certainly that strong rally involved some short covering. Looking a bit deeper, however, there were signs of continued underlying strength. The financial sector performed very well. Sure the M&A stocks were up on the Disney deal with speculation about more mergers, but the financial index is also at an all-time high; that is not a typical sign of short covering. Indeed, the continuing uptrends indicate that the action Wednesday was predominantly buyside. That volume shrank Thursday as stocks sold indicates that the sellers that were active in late January have for now gone into hiding.
The big question is even if Wednesday was buyside, did it represent a return to sustained buying or was it just in response to Greenspan's 'go out and be irrational' blessing and the promise of potentially more M&A activity in the future given the Disney deal. What we need to see to confirm the action is another strong upside volume session. As Monday is a holiday (Presidents' Day) Friday probably won't give us that strong trade. At this point we note that the market had every opportunity to cave in, but it has not. If it cannot continue this move it is at risk, but it has been at risk for a month and has managed to recover.
Market Sentiment
VIX: 15.31; -0.08
VXN: 23.53; 0
VXO: 14.9; +0.02
Put/Call Ratio (CBOE): 0.56; -0.12. Moved lower as the stocks moved lower, typically the opposite direction it should typically take.
NASDAQ
Fell back to the 18 day MVA on lower, average trade, taking a breather after a high volume rebound as notables such as HPQ said the quarter was lagging. Techs are not out of the woods yet; one day of strong upside trade has not shaken off the previous high volume selling or the tepid bounce from the 50 day MVA.
Stats: -16.05 points (-0.77%) to close at 2073.61
Volume: 1.957B (-11.14%). Volume fell off appropriately as techs sold back, but we note that it was still stronger than the volume on the rebound off the 50 day MVA. Again, NASDAQ will have to show strong volume again on the next move higher to give us more confidence in the recovery.
Up Volume: 703M (-666M)
Down Volume: 1.161B (+365M)
A/D and Hi/Lo: Decliners led 1.56 to 1. Breadth flipped on the turn to the downside. We note that upside breadth Wednesday was relatively weak given the price gains when compared to the modest price declines Thursday. Nothing to get all upset over, just an indication we are watching as it continues its move off the 50 day MVA.
Previous Session: Advancers led 1.5 to 1
New Highs: 233 (-33)
New Lows: 2 (0)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower but managed to rebound and test the Wednesday close (2089). It met resistance there and sold back. It was holding the up trendline (now at 2080), but in the last half hour dropped to the 18 day MVA. Volume faded to average; still respectable, but not distribution compared to Wednesday's upside move. It held where it needed to if NASDAQ is going to continue the move. It needs to show further volume on the upside.
S&P 500/NYSE
Volume faded as the large caps settled down as the DIS news becomes old news. A lower volume pullback after two higher volume gains is just what you want to see.
Stats: +0.03 points (0%) to close at 1152.11
NYSE Volume: 1.455B (-14.12%). Backed off to near average as the index gave back some of the Wednesday gains.
Up Volume: 623M (-706M)
Down Volume: 807M (+460M)
A/D and Hi/Lo: Decliners led 1.3 to 1. Very modest downside breadth, particularly when compared to the big upside breadth Wednesday.
Previous Session: Advancers led 2.35 to 1
New Highs: 338 (-110)
New Lows: 4 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After the Wednesday news and rally there was nothing to continue the move Thursday as the Disney/Greenspan combination was a tough act to follow. The pullback was what you would expect in a continuing rally, i.e., lower volume, holding near support (1150), no breakdowns. We still view SP500 as overextended as the recent test of 1125 support was just 30 points after a strong run. It still has room to the upside toward 1175, the early 2002 double top. That gives it room, but not a lot. The price/volume action has improved this week, and it needs to show us another solid upside session to be more convincing. It is still time to be careful here as SP500 approaches its this level; the accumulation is good to see, but the index is still close to important resistance.
DJ30
The blue chips faded back from the upper channel line (now at 10,758) on lower, below average volume as the Disney news became no news. Still solidly in the uptrend after the slight pullback, but it is not a complete repudiation of the distribution that cropped up in late January. Again, it remains in its uptrend and near the January highs (10,705), but it too has rather limited upside based on the levels it historically starts to correct. That would be 15% above the 200 day MVA or right at 11,000, a point that also represents some tops in its range of resistance that runs up to 11,300.
Stats: -43.63 points (-0.41%) to close at 10694.07
Volume: 197 million versus 278 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Greenspan has wrapped his testimony and did his best to tell the markets to keep on trucking, and other than the Michigan popularity poll (hard to call it a serious report anymore given its widely ranging results) there is a dearth of news to hit the wire. DELL reported after the close and after initially selling off, it rallied positive in late trade. Its costs are so low its margins keep on expanding. Again, this is Dell efficiency and branching out into other areas and capturing market share as opposed to a surge in computer sales that is driving the gains. Thus the market may not make too much of this Friday, though with so many outstanding shares, a move higher by DELL does impact NASDAQ.
As noted, Monday is Presidents' Day and thus we may not see the volume confirmation to show us Wednesday's move was more than a Greenspan euphoria/merger & acquisition one day wonder. Wednesday was solid, but it did not change the fact that SP500 is extended and NASDAQ has had a hard time returning to leadership since the late January distribution. The available upside is somewhat limited for SP500 and DJ30, so we continue to approach with caution.
Keep in mind that one of the important attributes of successful investing is patience. Patience to let stocks set up and make the moves we want, patience to let the market work through its periods of flux to set up better moves. We don't enter every play that hits a buy point just for this reason; the market may not be showing us the action we want or the stock may be erratic in its trade. Better to see the clean breakaway move. It is hard to fight the urge to rush in and we still fall victim to that on occasion. Just have high standards and you usually end up in good shape.
Support and Resistance
NASDAQ: Closed at 2073.61
Resistance: The March/August up trendline at roughly 2115. The January high at 2150. 2200 then 2300 represent tops from Q2 2001.
Support: The second up trendline (2080). The 10 and 18 day MVA (2070, 2071). The March/December up trendline (2041). The exponential 50 day MVA (2036). The simple 50 day MVA (2031). Below this the November and December peaks at 1975 to 1990.
S&P 500: Closed at 1152.11
Resistance: The January high (1155) did cause it to take pause after the big surge. Next is 1175, the high in that double top that spanned late 2001, early 2002.
Support: 1150, the first top in early 2002. The 10 day MVA (1143). The 18 day MVA (1138). 1125 is some minor support. 1106 is a May 2002 top. 1106 represents some early 2001 lows. The 50 day MVA (1114).
Dow: Closed at 10,694.07
Resistance: The January high (10,705). Upper channel line (10,758). 11,000 is 15% above the 200 day MVA. 11,300.
Support: The 10 day MVA (10,605). The 18 day MVA (10,567). 10,520 is the March 2003 up trendline. The exponential 50 day MVA (10,374). 10,353 from May 2002 high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
2-09-04
Wholesale inventories, December (10:00): 0.6% actual, 0.3% expected, 0.5% November.
2-12-04
Business inventories, December (8:30): 0.3% actual, 0.3% expected, 0.4% November (revised from 0.3%).
Initial jobless claims (8:30): 363K actual, 345K expected, 357K prior (revised from 356K).
Retail sales, January (8:30): -0.3% actual, 0.0% expected, 0.2% December (revised from 0.5%).
Retail ex-autos (8:30): 0.9% actual, 0.5% expected, 0.2% December (revised from 0.1%).
2-13-04
Trade balance, December (8:30): -$40B expected, -$38B November
Michigan sentiment, February preliminary: (9:45): 103.3 expected, 103.8 January
SUBSCRIBER QUESTIONS
Q: [Tuesday] you said, "... in the last half hour when a buy program hit the thin market. . ." You often make statements that imply there is more information to be had than we can or do access. While I suspect this access involves hefty annual fees I wouldn't be willing to pay as a private investor, I'd still find it orienting and educational to learn what tools you use and how they help you do what you do. Would you be willing to share that information? How do you know what you know when you know it?
Thanks and continued success.
A: With respect to buy programs, there is no service to subscribe to that alerts you to buy programs. It is more experience in reading the market when a basket of certain stocks start moving and what type of trading volume moves the stocks. We have several computers running in the 'nerve center' with multiple screens. They use real time feeds to monitor many different indexes, sectors, volumes, block trades, news, and of course individual stocks. We can thus see if there are certain sectors that start to move vis- -vis other sectors. We can see who is buying as well.
In addition we have good relationships with people on the floor, both the actual trading floor as well as the electronic trading floor. We can call them up when we see something and get a bit more information from them as to who is doing what.
In sum, it is no big secret, just the set up to have enough information coming in and the ability to process it. A few contacts don't hurt to get the 'hands on' feel as well.
End part 1 of 3
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