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us stock market, understanding the stock market
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3/09/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: TTP
Buy alerts issued: INTV
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:
- Selling continues as NASDAQ undercuts February low, SP500 breaks 18 day MVA.
- Economic calendar quiet again, giving stocks no anchor.
- Late rally keeps the overall consolidation alive, but distribution continues to work at eroding it.
Consolidation is getting its test.
The Monday selling momentum spilled over into Tuesday. An early test of 2000 on NASDAQ brought in some buyers but it could not hold. We expected an undercut of that level, and it came as the first bounce sputtered about 40 minutes into the session. The rest of the trade was downside. Tuesday NASDAQ had more gravitational pull than the large caps as the latter fell with NASDAQ; SP500 can still try to be a leader, but this round went to NASDAQ. SP500 broke through its 18 day MVA for the first time in 4 weeks, but that still does not take it out of its consolidation range. Stocks continued to sell, however, until a little intraday double bottom set up in the last hour. We sent an alert to that fact and then watched to see how stocks would react. SOX surged back up, closing positive and at a session high. SP500 bounced up off the simple 50 day MVA. NASDAQ came ever so close to recapturing 2000, but gave it up in the last minutes of trade.
Volume moved higher on NASDAQ and SP500 as stocks sold, an official distribution session. NASDAQ is fighting to hold the bottom of the range, SP500 has room to play with, and the small and mid-cap indexes are holding at the 18 day MVA in very normal looking pullbacks in right in the middle of the uptrend channel. The small and mid-caps were market leaders along with NASDAQ, and while they are pulling back, they are not in danger of any breakdown, and that is very good for the continuing uptrend and the current consolidation. There is a legitimate struggle ongoing with NASDAQ and SOX and that is getting all of the attention, but the rest of the market is holding up quite well. Remember, try to cut through the 'noise' (right now all of the talk about going defensive and selling the techs) and focus on what the market is doing: NASDAQ and SOX are struggling to hold on, but the rest of the market is holding up in a rather orderly consolidation. Shades of early 2003.
THE ECONOMY
Without scheduled economic reports to provide that data, lots of 'loose' talk about the economy abounds.
Listening to the evening talk shows and the vitriol regarding the economy one would think that the economy was really in the tank. There are those who swear that 6% GDP growth, record low interest rates, soaring productivity (and the subsequent higher standard of living), record growth indicators showing 20 year highs, and a historically low unemployment rate are the symptoms of something terribly wrong in the economy. Judging by the opinion polls, this is catching on in a society that more and more wants government to solve problems as opposed to providing the opportunity for citizens to make the decisions about where to best spend their capital. Further, a lot of the talk about how bad things supposedly are is making those with jobs nervous, and thus we see declines in the consumer polls.
We don't get too wrapped up in the 'talking down' the economy bit or the sentiment; if the consumers have the money they will spend it, and with household wealth not greater than it was pre-market bust and disposable income higher thanks to lower marginal tax rates and investment incentives, the spending will continue.
The real story is back in the actual numbers. You can downplay the 5.6% unemployment rate all you want (and Greenspan gave those wanting to do so the ammunition in one of his speeches to Congress), but that rate is showing us that there are jobs being created, just not the traditional 9 to 5 jobs. The economy is in transition and many people are working contract (maybe not their choice, but that has been a growing percentage of employees for over 5 years) and many new businesses are sprouting up. Thus people are answering 'yes' that they are working. Moreover, this number is a leading indicator (as far as employment figures go; kind of a leading indicator within a lagging indicator) for non-farm jobs as contract jobs are eventually turned into full-time jobs and thus counted on the non-farm side of the equation. Further, a small, almost insignificant, number of jobs are heading overseas in outsourcing. Even Robert Reich, Clinton's labor secretary, notes that the amount of IT jobs heading overseas versus all of the IT jobs in the US is miniscule.
What will stop jobs from showing up is putting pressure on those that create the work, i.e., small businesses that create over 65% of the jobs. How do you pressure them? Repeal investment incentives and raise their marginal tax rates. Recall that most small businesses are sole proprietorships, 'S' corps, or partnerships. Profits in those businesses flow directly to the individual and are taxed at individual rates. Raising taxes on the entrepreneur class takes money they need to live directly from the bottom line. That changes the risk/reward calculations and starts killing off investments at the margin. That leads to further contraction as the pocket books are put back on the hip. The economy starts to shrink, tax revenues actually fall even though rates rise. Even Mr. Greenspan noted this but to most Americans raising taxes on the ethereal 'rich' is the way to solve all problems.
Warren Buffet must be feeling the guilt of billions.
It must be tough being a billionaire. Buffet's latest yearly statement attacks corporate taxes and individual taxes. He complains that if all corporations paid the taxes his company pays there would be no deficit. Somewhere back in the dark ages of economics it was pretty much proven that a corporate tax is really a tax on consumers. Corporations merely collect taxes from consumers for the government in the form of higher prices. Many argue that if corporate taxes were eliminated corporations would merely keep the difference and increase profitability. But then there is that free market motivator called competition. In order to gain market share some would pass the savings onto customers in the form of lower prices. That would force others to do the same; prices would come down.
Indeed, the tax code is designed to promote this even though there are corporate taxes in name. Corporate taxes are mostly political; the leaders can point to the code and assure thus that everyone and everything (corps are not beings) is taxed. The tax code, however, is designed to allow corporations to write off almost all if not all income if they take advantage of what the code allows. Thus you have corporate taxes in name but not in practice, and consumers pay less for their goods (and of course, more in taxes to fund the government). The political argument is being turned on its head with another political argument by the likes of Buffet. He is pointing to the code and saying it is not being enforced; if it were he claims that corporations would easily pay all of the debt. Of course, then the consumer would pick up the tab still because the consumer would pay more for goods and services.
The bottom line is the corporate tax whining is pointless: the consumer picks up the tab whether there are corporate taxes or no corporate taxes. Buffet uses the issue as a political football to forward his own agenda. He has his idea of what America should be, and now that he is ready to retire and/or die after making his billions on the same system he complains of he wants to make his social mark in addition to his financial mark. There is nothing wrong with making your mark, but don't take advantage of what the system offers and then try to block others from doing the same. This is America where if you want to you can work hard, work smart, and make your dreams come true. There is nothing worse than those who get theirs and then try and change the rules to close the door to others. If Buffet was at least intellectually and economically honest his argument would at least be something to consider. As it is his stance clearly has some agenda behind it, and it has been fairly clear the past two years it is political.
THE MARKET
A late bump kept stocks mostly in their consolidation. There were breakdowns, but they were not widespread, at least no more than on Monday. Leaders for the most part held near support. NASDAQ closed below the February closing low, but it also held above the October to December tops. As noted, SP500 broke the 18 day MVA but it remains easily in the consolidation.
The higher volume showed some distribution again, the second straight session on NASDAQ and the second on SP500 this month. Volume remained strong and was strong late as stocks rallied back from the lows. It was not a great rebound, but it was a rebound off of significant levels. SP500 tapped the simple 50 day MVA and rebounded. NASDAQ undercut the prior lows, held the October-December consolidation tops, and rebounded as well, just giving back 2000 in the last minutes. SOX led the late charge, surging 8 points in the last hour from low to high, closing at a session high. On the low it held over the next support level at 475, triggering the move back up. While it may not look like much it does show those are still levels of importance to buyers. Sure we could see further undercuts of this to jack fear up higher, but the action indicates that the consolidation has not cratered.
Market Sentiment
There is more talk of further correction. On CNBC the teaser to one segment was 'is this the start of the correction?' We are now hearing more of the advice to sell techs, chips, and small caps and go defensive. Volatility is moving higher though it is still within the longer downtrend, just now testing that trendline. Other signs of fear are cropping up in the numbers as the put/call ratio jumped to 0.97 on the close, moving close to that 1.0 level that can indicate speculation on the downside is getting extreme. It typically takes a couple of closes at 1.0 or better to signal a potential turn, but it is getting there.
VIX: 16.6; +0.81
VXN: 24.7; +0.62
VXO: 16.37; +1.04
Put/Call Ratio (CBOE): 0.97; +0.15. Sharp rise to close near 1.0 that starts to signal speculation or fear is reaching more extreme levels. When sentiment reaches extremes it typically signals a turn is coming. This indicator often takes 2 or 3 strong showings to signal a change.
NASDAQ
Broke just below the February low on stronger trade but managed to hold the late 2003 consolidation. The big battle is on at this level.
Stats: -13.62 points (-0.68%) to close at 1995.16
Volume: 2.11B (+2.47%). Volume rose as NASDAQ undercut the February low, showing more selling than buying. A late bounce was nice, but not enough force to really show buyers stepping in with any strength. That makes two distribution sessions in a row, and that is weighing on tech stocks.
Up Volume: 631M (+252M)
Down Volume: 1.442B (-56M)
A/D and Hi/Lo: Decliners led 2.05 to 1. Downside breadth is starting to strengthen even as NASDAQ did not move that much lower.
Previous Session: Decliners led 1.98 to 1
New Highs: 97 (-113)
New Lows: 8 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Hit 1987 on the low, undercutting the prior 1991 intraday low. It rallied late to retake 2000 but then gave it up in the last few minutes. It remains over the 1989.82 closing high in the October/December 2003 consolidation. You want to see stocks or indexes hold over the tops in prior consolidations as a sign of continuing strength. This is the important battle for NASDAQ in the sense that it either affirms the bottom of the consolidation at the prior consolidation highs, thus allowing it to finish and move on from here, or it still seeks the bottom with next support at 1950. The latter means the base has longer to work is it will make a new low and then work laterally from there. Again, the rally back late was good to see, and SOX was surprisingly strong off the lows, but it was a modest blip. It tests the October/December highs again and makes another rebound attempt.
S&P 500/NYSE
Broke the 18 day MVA for the first time in four weeks but managed something of a bounce off the simple 50 day MVA on rising trade. Distribution with a possible twist of upside as it remains in its range.
Stats: -6.62 points (-0.58%) to close at 1140.58
NYSE Volume: 1.474B (+17.72%). Volume surged back up to average on the selling. Clear distribution even with the late bounce off the simple 50 day. Second session this month, and that is not a whole lot of dumping.
Up Volume: 261M (-111M)
Down Volume: 1.196B (+330M). The downside crushed the upside and there was still a rebound.
A/D and Hi/Lo: Decliners led 1.67 to 1. Worse, but not really bad at all.
Previous Session: Decliners led 1.37 to 1
New Highs: 185 (-189)
New Lows: 8 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Fell below the 18 day MVA (1147) and all the way to the simple 50 day MVA (1137) where it bounced modestly. You would expect it to do that, and without more it is a blip. SP500 is still comfortably within its range that runs from roughly 1125 to 1160. The test of 1160 resistance that failed helped the rollover. SP500 really needed to pullback and get more air out of it along with NASDAQ. It most likely ultimately tests 1125 again in the consolidation. It needed some of the air let out, and this was a sharp way to start. Another sharp break toward 1125 will jack up more downside speculation if this index is selling as well.
DJ30
DJ30 broke below the 50 day MVA (10,483), undercutting the late January, early February closing low (10,468) but also managing a modest rebound to keep it in the range as it held over the early January lows that started the consolidation (10,409; 10,427). That keeps it in the range by a hair, but volume was also shooting higher, its highest in a month and well above average. You cannot really find any one factor, but the GE offering of new shares has jumped its trade higher as that stock is sold near term. The breach of the 50 day MVA is not a good sign for the range to hold; the momentum is downside and a test of the September/November up trendline (10,375) looks likely. DJ30 does not have a heck of a lot of support after that level down to 9900.
Stats: -72.52 points (-0.69%) to close at 10456.96
Volume: 246 million 199 million Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The economic news returns Wednesday but it is not the type that will turn the market (trade balance, wholesale inventories). Thus the market has to continue to work things out on its own, dealing with the political climate, valuation worries, energy price worries, where to get helpful homemaking pointers now that Martha is cancelled, whether to boycott Busch (the beer) given its affiliation with Ludicrous.
We poke a little fun to help keep some perspective. The gloom level is ratcheting up, and you have to keep an eye on the bigger picture. At the highs there is talk of DJ30 11,000. When things start to cool off there is talk of DJ30 9500. The truth, as usual, lies in between.
SP500 and the smaller cap indexes still have plenty of room to pullback, take out some fluff, then resume the trends. SOX has already come close to legitimate support at 475. It may certainly test it again, and we close our position on that move. A remaining key to the market is NASDAQ's performance at this 2000ish level that is over the late 2003 consolidation. If it falls into that range significantly, the base gets a lot bigger in length more so than downside in our view. NASDAQ 1950 seems logical as it has only sold for two sessions on this current turn lower. It can test toward that level, SOX test back to 475ish, and then find some support.
Again, we are going to watch how NASDAQ trades over the late 2003 highs; it is clear it is still in the selling mode, and now it is trying to really set that bottom. If the 7% correction level in new bulls is to hold, it is going to have to make a stand here. That is one reason we like to see the gloom rising; it needed to spike up to make this one of those sharp tests lower that gets the fear higher that we have discussed the past two weeks. We are still looking at this as a pretty normal consolidation to this point, and the rising gloom is a normal part of that normalcy. Those stocks that cannot hold support, i.e., cannot show themselves to be leadership material, we close out. Those that do hold support through this downturn are the stocks that are going to really pay off for us when the consolidation is over. Keep an eye on the big picture here and that keeps your understanding of what is going on better than most.
Support and Resistance
NASDAQ: Closed at 1995.16
Resistance: The exponential 50 day MVA (2035). The simple 50 day MVA at 2062. The March/December up trendline (2100). The second up trendline (2145). The January high at 2150. 2200 then 2300 represent tops from Q2 2001.
Support: 2000 is still a key level not completely broken. Below this the November and December peaks at 1975 to 1990 from the October/December consolidation. 1950 provides some support, then mixed tops and bottoms 1900.
S&P 500: Closed at 1140.58
Resistance: The 18 day MVA (1147). The January high (1155). Next is 1159 (February highs) and 1160 (the closing) and 1175 (intraday), the high in that double top that spanned late 2001, early 2002.
Support: The simple 50 day MVA (1137) held Tuesday. The exponential 50 day (1131) 1125 is some minor support. 1106 is a May 2002 top and represents some early 2001 lows.
Dow: Closed at 10,456.96
Resistance: The exponential 50 day MVA (10,483). The 18 day MVA (10,579). 10,695 is the March 2003 up trendline. The January high (10,705).
Support: The early January lows that started the consolidation (10,409; 10,427). September/November up trendline (10,375) looks likely. 10,353 from May 2002 high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
3-10-04
Trade Balance, January (8:30): -$41.8B expected, -$42.5B December.
Wholesale inventories, January, (10:00): 0.4% expected, 0.5% December.
3-11-04
Initial jobless claims (8:30): 345K expected, 345K prior
Retail sales, February (8:30): 0.6% expected, -0.3% prior.
Retail sales ex auto (8:30): 0.5% expected, 0.9% January.
Treasury budget, February (2:00): -$100.0B expected, -$96.7B January.
3-12-04
Business inventories, January (8:30): 0.3% expected, 0.3% December.
Current Account, Q4 (8:30): -$136.2B expected, -$135.0B Q3.
Michigan sentiment, March preliminary (9:45): 95.4 expected, 94.4 February.
End part 1 of 3
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us stock market
understanding the stock market
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