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us stock market, understanding the stock market
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2/28/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: VIP
Buy alerts issued: OSI; WRLS
Trailing stops issued: None issued
Stop alerts issued: 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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market continues it character as NASDAQ, SOX fail 50 day MVA test.
- GDP revisions starting higher, manufacturing employment improving.
- Volume rises as NASDAQ churns, MVA crossover on SOX.
- Subscriber Questions
NASDAQ clears 50 day MVA, at least for an hour.
There was again a lot of warm feeling about the market early in the Friday session as the indexes were positive after some very solid economic data. NASDAQ crossed over the 50 day MVA and SP500 topped the 10 day MVA and was making the moves on the more serious resistance over 1150. Volume was running light again, however, and after a short stint above the 50 day on NASDAQ, the low volume caught up with the move and stocks fell off the table.
NASDAQ made one more run at the 50 day MVA, but it was half-hearted. IN the last hour it stalled just below that resistance and fell again. Volume moved higher as it did, though it was still below average by the close. As we noted in a last hour alert, NASDAQ was forming a doji on the candlestick chart on rising volume after a test of key resistance. When that follows a low volume bounce higher that is a sign that the move has run out of gas and that the sellers are reasserting themselves at this key point. SOX was a similar story, but it never got past the 50 day at all, fading from the 18 day MVA after its own low volume rebound. At the same time, DJ30 and SP500 held their own once more, and the smaller caps were the best performers, doing the best they could to 'lead' the market.
In short, the relief bounce continued its course as a part of the overall consolidation. Rumors that Bin Laden was hemmed in once again helped the bounce, but that could not keep the buyers' interest. The name Tora Bora came to the mind of many would be buyers. Solid economic data was nice as well, but not stupendous enough to get a lot of buyers jumping on the prospects of even better earnings appreciation near term that was not already priced into stocks.
Questions about valuation at this juncture are giving investors some pause. A huge Q3 GDP surge has backed off and people are still trying to determine just how much it has slowed down. On top of that there is a political campaign ongoing with one side bashing the economy and promising tax increases and bigger government and the other saying more economic reform is still needed. That always splashes some cold water on the market because there is uncertainty that is becoming reality. The market has to digest this, i.e., get comfortable with the economic strength again and the fact that this is going to be a pretty brutal campaign as the ideologies are pretty distinctly separated. As we noted before, this could take a while. If the market continues on as is, it looks as if it is about a third of the way there.
THE ECONOMY
Second iteration of Q4 GDP improves on inventory rise.
Inventories are finally starting to make a GDP impact. Estimates for the second round of Q4 GDP called for a decline to 3.8%. The forecast drop was based on the widening trade deficit: imports are deducted from GDP. Inventories, however, jumped to $14.9B from original estimates of $6.1B (-9.1B in Q3), and that offset the import increase and then some.
Business investment jumped 9.6% (annualized) versus 6.9% expected; lower than the 12.8% in Q3, but that was a massive rebound rise, and if kept that pace there would be trouble (shooting all of your ammunition too early). As it is, Q3 was the surge that got things going, and now it looks as if there is a nice, steady fire going in the economy. For example, equipment and software purchases surged 15.1%, just off the 17.6% pace in Q3. The missing component from the economy for three years was business investment. That appears to have ended with a very solid, steady burn.
Inventories helped significantly, adding a full point to GDP. After falling in Q3, companies appear more willing to hold bigger inventories, a sign of improved confidence in the sustainability of the economic recovery. One thing overlooked is the relation between the tax refunds, consumer spending, and the inventory build.
While everyone talked about these, no one related them. Companies are not stupid. Just as economists have been talking about the $100B in tax refunds setting off another consumption binge at the end of Q1 and in Q2, businesses have obviously been taking note and pushing up inventory levels in anticipation. In this way they will ready without being required to suddenly have to ramp up production.
This has jobs implications. While sustained increases in production and inventory sizes will lead to some hiring, it is apparent to us that companies were working on increasing inventories with a good lead time so they would not be caught short and forced to hire quickly. Companies are doing what they can to avoid hiring and thus keep the overhead as low as possible so as to recoup as many lost profits as possible during the recession. They are resisting. If economic growth would jump up to 5.5% to 6% for another quarter or two, they would then have no choice as the growth would be just too great.
The drag on GDP was imports. Inventories are added to GDP; as seen when the economy was declining, that inflates GDP because inventories grow larger as consumers and businesses slow their purchases. In an expansion that is not so bad as consumption is on the rise and inventories are built to meet that demand. Opposite inventories, imports are subtracted from GDP. Imports grew 16.4% versus the 11.3% initially reported and a paltry 0.8% in Q3. That significantly reduced GDP. This is one of those misleading indicators, however, because US consumers love imports, and with domestic spending strong and import spending strong, that only shows a solid consumer sector that is still matching the supply side growth. This deduction from GDP that in reality shows consumer strength and is a good sign for domestic production as well subtracted heavily from Q4 GDP as opposed to Q3. Take it out and it is more of an apples to apples comparison to Q3 and gets Q4 GDP closer to 5%. That is not too shabby.
Chicago PMI shows expanding employment.
February manufacturing activity in the Midwest faded slightly to 63.6 from 65.9. That makes 10 straight months of expansion and 4 consecutive months over 60; over 50 shows expansion. Pretty strong across the board, but the key was the employment sub-index. It rose to 54.8 from 48.3 in January. Break out the bubbly, the jobs are back. Well, considering manufacturing is now a very small part of the economy overall and this was just one region reporting, no use in warming up the band. As we have seen, the national number lags the regional reports by about 2 months. It does not hurt, and it shows needed improvement, but it is not the piece of the puzzle that is suddenly going to mean 250K non-farm jobs were created in February.
THE MARKET
Outside of NASDAQ and SOX the market held up well. Breadth was solid, led by gains in the market leading mid-caps and small caps. DJ30 and SP500 continued to look solid as well, showing slight gains on higher volume. No breakouts and they gave back their highs, but they are holding up very well in their lateral consolidations. They still need to pull back further to set up the next move, but they look fine in their narrow lateral ranges.
As noted earlier, NASDAQ was not showing great action with the higher volume doji at resistance following a lower volume rebound from higher volume selling. All the indications of a modest rebound running out of steam and sellers jumping on at that resistance. SOX could be even more important. Even though it is a small part of technology, it is key as chips tend to lead the market both up and down.
SOX is showing an important crossover where the 18 day MVA is crossing down through the 50 day MVA. It has been below the 50 day for 5 sessions. It is not definitely a breakdown, but it is trending below the 50 day and that typically indicates more selling. Not straight line; it can bounce around the 50 day MVA and even back over it, and it might not be as deep of a correction as say in early 2003 when SOX and NASDAQ both showed this same action. It is a sign of continuing weakness, however. The market moves in momentum; one action begets another, trends stay in place until something big breaks it. Once an index shows this type of crossover it tends to keep that momentum. Another sign of the consolidation underway.
Market Sentiment
VIX: 14.55; -0.28
VXN: 22.84; -0.26
VXO: 14.76; +0.11
Put/Call Ratio (CBOE): 0.72; +0.08. Edging higher but still not at a level that starts to indicate a reversal. Again, need to see a couple of closes over 1.0 to starting showing us reversal indications, and of course, as a secondary indicator we would need to see improving price/volume action and better patterns setting up.
NASDAQ
Tapped the 18 day MVA but then rolled over. Modest loss but the action tells a bigger story.
Stats: -2.75 points (-0.14%) to close at 2029.82
Volume: 1.876B (+6.27%). Still below average but volume was up as NASDAQ tried the 50 day MVA, broke it, but then gave it back up. Heavier volume selling the prior week, lower volume rebound back to resistance, and rising volume as it churns at resistance. The price/volume action indicates the consolidation needs more work.
Up Volume: 863M (-338M)
Down Volume: 980M (+446M)
A/D and Hi/Lo: Advancers led 1.22 to 1. Advancers backed off as it bumped resistance and turned over.
Previous Session: Advancers led 1.56 to 1
New Highs: 148 (+27)
New Lows: 5 (0)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Not much of a loss at the close, but it speaks to a continued consolidation. Thursday night we figured it would tap the 18 day MVA on the high and the fade. It did just that as it broke over the 50 day MVA (2036) waived at the 18 day MVA (2046) and then reversed. We also note that it was always below the simple 50 day MVA (2050) even on the high. That low volume recovery and higher volume stall at resistance is a pretty clear indication the consolidation is continuing and still has significant work to do. On top of that the 18 day MVA is starting to crack the 50 day to the downside. As noted above, it looks to be about a third of the way through, but that is very, very hard to extrapolate.
S&P 500/NYSE
Held over the short term moving averages, looking solid even though it gave back much of the move.
Stats: +0.03 points (+0.03%) to close at 1144.94
NYSE Volume: 1.503B (+9.63%). Volume was up significantly, moving back above average as price/volume action improves. Very good to see such solid action in the consolidation as that shows there is a switch back to modest accumulation, just what you want to see.
Up Volume: 888M (-1M)
Down Volume: 597M (+129M)
A/D and Hi/Lo: Advancers led 2 to 1. Rode the back of the mid and small caps. When they are firing breadth improves as they make up most of the stocks in the market.
Previous Session: Advancers led 1.71 to 1
New Highs: 279 (+80). Building. Not strong but building.
New Lows: 2 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Held up well over the 10 and 18 day MVA (1144, 1142) but could not hold the gains as it tested toward the next and very significant resistance. That resides at 1155, but the real stuff is at 1160 and 1175, the closing and intraday highs from the early 2002 double top that sent the market crashing down on the last leg of the downtrend. We are not expecting a breakout over that level any time soon despite the strength the index is showing. NASDAQ is still working on the bottom of its consolidation, and we still think SP500 has a test of the 50 day MVA (1125) ahead of it before this move is over.
DJ30
Continues to hold up very well in the range (10,400 to 10,700), moving in the middle as it holds over a long term down trendline (9580) formed at the January 2000/September 2000/May 2001 peaks. Volume rose to average as DJ30 posted a small gain, giving back 22 points off the high. It basically went nowhere, continuing the lateral move of the past week, the range narrowing. Five weeks into the lateral consolidation it is still too far above the 200 day MVA (9669) to have much upside. It is 9.5% over that level, near the point where the index struggles (10%). Note how it hit 13.5% over the 200 day MVA at the first peak of this run in late January, and that triggered this lateral move. Historically DJ30 starts to correct when it hits 15% over the 200 day. We talked about it at the time, and sure enough the struggle began.
Stats: +3.78 points (+0.04%) to close at 10582.93
Volume: 200 million versus 185 million Thursday. Maybe price/volume action is turning the corner, but still much too early to make that call.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Huge week for economic data. The market has had its earnings and the usual bout of selling after investors got the pulse on how they would come out. Now the market looks at the economic data afterwards, mixes it with the earnings data, and eventually will come to a consensus that this remains a good economic environment.
Before that conclusion we anticipate both further lateral and also some downside movement. That will allow stocks to form up their bases, will let the 200 day MVA rise higher, and will both wear and scare out many investors. That will set the stage for the next move.
After the action Friday we anticipate NASDAQ to find 2000 again and maybe undercut it some. SOX is looking to test the February low (491). We still think SP500 may test the 50 day MVA before this is over. Indeed, to really make a good consolidation it needs more of a pullback. That may take some time. NASDAQ looks ready to test lower along with SOX, and that should limit the upside on SP500 and DJ30 despite their very solid patterns. Their strength is just indicative of the underlying market strength. We still feel there needs to be more fear, however, before this is over. Based on the action we are surmising there is still quite a bit of time before NASDAQ is ready to breakout. Again, that is hard to ascertain, but based on NASDAQ action and the price patterns we see in many NASDAQ stocks, more time is needed.
That prognosis does not scream of bountiful opportunity upside and downside. The indexes have been holding together in a fairly tight range, showing weakness but refusing to break down. There will be more downside action but for now it does not look like major breakdowns. SOX is setting up to trend lower here and NASDAQ has some more downside near term. That will put some drag on the large cap indexes as well.
The range trading means a couple of things. We will continue to focus on the plays with the solid patterns showing accumulation and strong breakouts. They are still out there but harder to find. Downside plays also exist, failing tests of resistance ala NASDAQ and SOX. Given the relatively tight overall range, however, we have to set reasonable profit targets. I was talking to a novice investor Friday about the importance of understanding support and resistance along with price/volume action, particularly in a market such as this one that is struggling through a consolidation. How understanding that would help us set more reasonable target and loss points. How we may want a 20% stock or a 100% option gain, but in the current climate would settle for 10% or 50%, 7% or 35%, etc. if a move started to get sloppy. During this time we should keep that mindset. We can always find stocks that we can work a 10% or so gain on (and commensurately larger option gain), and in this climate that is not that bad. Before too long the market will get the consolidation worked out and stocks will start making more sustained moves once more where we can pile on the gain.
Support and Resistance
NASDAQ: Closed at 2029.82
Resistance: The 50 day MVA (2037). The 18 day MVA (2046) and the simple 50 day MVA (2050). The March/December up trendline (2075). The second up trendline (2115). The March/August up trendline at roughly 2147. The January high at 2150. 2200 then 2300 represent tops from Q2 2001.
Support: 2000 provides some support from the October/December consolidation. Below this the November and December peaks at 1975 to 1990. Some support at 1900.
S&P 500: Closed at 1144.91
Resistance: The January high (1155). Next is 1160 (the closing) and 1175 (intraday), the high in that double top that spanned late 2001, early 2002.
Support: The 18 day MVA (1142). 1125 is some minor support, bolstered by the 50 day (1124). 1106 is a May 2002 top and represents some early 2001 lows.
Dow: Closed at 10,583.92
Resistance: The 18 day MVA (10,598). The 10 day MVA (10,605). 10,625 is the March 2003 up trendline. The January high (10,705). Upper channel line (10,795). 11,000 is roughly 14% above the 200 day MVA. Then some price tops at 11,300.
Support: The simple 50 day MVA (10,513). The exponential 50 day MVA (10,455). 10,353 from May 2002 high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
3-01-04
Personal income, January (8:30): 0.5% expected, 0.2% December.
Personal spending, January (8:30): 0.4% expected, 0.4% December.
Construction spending, January (10:00): 0.3% expected, 0.4% December.
ISM Index, February (10:00): 62.0 expected, 63.6 January.
3-03-04
ISM Services, February (10:00): 64.0 expected, 65.7 January.
Fed Beige Book
3-04-04
Initial jobless claims (8:30): 345K expected, 350K prior.
Productivity (revised), Q4 (8:30): 2.6% expected, 2.7% prior.
Factory orders, January (10:00): 1.1% expected, 1.1% December.
3-05-04
Non-farm payrolls, February (8:30): 135K expected, 112K January.
Unemployment rate, February (8:30): 5.6% expected, 5.6% January.
Hourly earnings, February (8:30): 0.2% rise expected, 0.1% rise January.
Average workweek, February (8:30): 33.8 expected, 33.7 January.
Consumer credit, January (3:00): $5.5B expected, $6.6B December.
End part 1 of 3
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us stock market
understanding the stock market
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