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3/16/04 Investment House Daily
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SUMMARY:
- Volatility of expiration week session exacerbated by FOMC.
- Manpower shows hiring starting, Fed going nowhere with rates, Greenspan getting ready to take it to the house.
- No bell ringing but market still signaling it is setting the floor on the consolidation.
Fed triggers some selling but stocks recover, NASDAQ shows slight accumulation.
Stocks were volatile from the open, reversing the Monday selling at the open, rallying well and posting 1% gains. Then the pre-expiration, pre-Fed volatility set in. Before the Fed announced its decision the gains were cut in half. As is typical the market edged higher ahead of the announcement. The Fed held rates steady but seemed a bit more concerned regarding job growth. That kicked the market in the gut, it fell, but then managed a nice, solid rebound to close in positive territory.
Again, typical volatility ahead of expiration Friday. NASDAQ rallied back late on rising volume. It was not above average volume, but it was rising as NASDAQ posted a modest gain. Sure it would have been better if it held onto the 20+ point move, but in a correcting market holding near support and rebounding from selling to post a rising volume gain is just what you want to see. We have stated that the market needs to start showing improving price/volume action (lower volume on up sessions, lower volume on down sessions) at this level to bolster the signs sentiment is getting to extreme levels, and NASDAQ's action fits the bill. It is not a 100%, damn the torpedoes type day as you are dealing with expiration week that sees higher volume based on position shuffling. Further, NYSE did not pitch in with its own rising trade. It did hold what is looking to be more important support at 1106 and bounce on the close as well, but we sure would like to see its price/volume action improve as well at this attempt at a turn.
THE ECONOMY
Manpower, Inc. (staffing & outsourcing) survey indicates hiring to start.
28% of surveyed firms intended to hire, 6% planned to layoff, and 62% said they were going to hold things status quo. That hardly seems as if hiring is imminent, but according to Manpower, these are "very strong" numbers. The last time the numbers were this high was in 2000 - 2001 when the economy was heading into decline. That means that hiring is just now getting back to those pre-decline levels. That means while productivity has been holding down hiring, Manpower sees continued strong demand cited by survey respondents as causing production rates to break through the productivity curves that have continued to run higher.
Manpower has tracked its survey versus the government's payroll figures since 1974 when it first started the survey. The data shows that the Manpower survey is a leading indicator compared to the government non-farm jobs report, tracking it closely. When the Manpower survey starts to show these readings, Manpower says that hiring is inevitable as long as demand continues. While consumer sentiment has softened, retail sales are showing no signs of a slowdown. Indeed, the Manpower survey notes that businesses are saying demand is very strong. Thus, job creation is coming.
The caveat is that the numbers are just now turning in the Manpower survey. As noted, it is a leading indicator, meaning that the hiring will still not show up until further down the road. Manpower said it is just now hitting levels just before the economy started its decline; it will take time for that to translate into actual jobs with hired employees. Of course, as many companies are filling the gaps productivity gains cannot fill with contract workers from companies such as Manpower, the conversion will be quick once they are put on the permanent payrolls. Thus when it occurs it will be a bit outsized month as many have been expecting. We were looking for April as that month, but the Manpower survey suggests it could be well into the summer. Bummer.
Fed keeps rates at 1%, points to slowing layoffs, lagging jobs.
The fed left rates unchanged as it sees evidence continues to accumulate that output continues expanding but that, despite slowing job losses, new hires continue to lag. To all of those suggesting the Fed is going to raise rates in the near future, we again say watch the non-farm payroll numbers. The Fed has been clear for the past year and more that it is not going to raise interest rates, regardless of the other data, until there is clear evidence of strong job growth. That means several months of 200K+ job creation before the Fed even it is ready say it is ready to act. One pundit said 'but the FFF contract shows a rate hike in October.' Big deal. The FFF contract is a great indicator as to Fed action, but its track record is solid only in the month before the meeting, and then is even better in the final two weeks.
The Fed did throw the economy a bone, saying again that with the improvement is sees the risk of an 'unwanted fall in inflation' (deflation) is equal to the risk of an unwanted rise in inflation. As always, a verbose way of stating the economy has improved off of the deflationary concerns plaguing the economy through early 2003. Of course, that adds little to what we already know.
Rumor has Greenspan to retire early.
We theorized several months back that Greenspan would be re-nominated, accept, then retire after the election. Larry Kudlow has his sources and he is stating that Greenspan will be offered another 2 year term but Greenspan will turn it down and Larry Lindsey will be the appointee. He is a believer in the supply side and tax cuts to stimulate the supply side. That is good for the economy in our point of view.
We have pondered allowed the past two months where was this Greenspan for the past 5 or more years. Greenspan has made strong and logical speeches to Congress and others about the need to control spending, rethink so-called entitlements, and use continued tax cuts to protect the taxpayer from 'bracket creep' as well as keep economic growth strong and healthy so the tax receipts are there to pay for what spending is left after serious cuts. We surmised he was preparing for his departure, but according to Kudlow, this is a 'victory lap' he is taking before hanging up his briefcase indicator, his bag of market quelling clich s, etc.
Victory, however, is in the eye of the beholder. We have said before that declaring victory with this recovery is similar to setting a 4 alarm fire and then taking credit for tamping out the ashes and clearing away the debris after the building has burned to the ground.
THE MARKET
Up and down session characteristic of the days preceding expiration Friday, but a good finish with rising NASDAQ volume put a better shine on the action. The action was better than most days in the past week for the upside, but it was hardly a clear stroke of strong institutional buying. Stocks fought off selling and some issues with the Fed's statement regarding jobs and rallied toward the close. NASDAQ volume rose on a modest gain, indicating some modest accumulation. That in itself is a milestone for the past two weeks as the selling tempo and volume quickened. The modest accumulation is an indication along with the sentiment indicators discussed in the past few reports that the selling appears to be running its course.
At this juncture that is all it is showing, however. At most it is making the bottom here. That is still quite a way off from ready to break higher as the price/volume action has to continue to improve and stocks have to set up good bases to break higher from. We continue to find some good bases, but there are not dozens and dozens to choose from that meet our criteria. As the consolidation continues the bases will be formed and prepare for the next run. This level looks as if it could be the start of the bottom as we have noted several signals the past few sessions, but that is not the same as working laterally on good price/volume action.
As for the rest of the week, with options expiration ahead, the action will always be somewhat controlled by the positions the big money has taken. Looking at the March index options the puts and calls are pretty evenly paired at the near strikes. That means that there is little likelihood of a big move one direction or the other ahead of expiration. Volatility yes, but big sustained moves are less likely without some outside influence in the form of really big news. The jobs report is not for another three weeks, and from the economic side that is about all that would cause a rally. As we saw Monday, world events can always trump market action, but we cannot control that. Thus we anticipate some volatile action but still within the recent range. That would be good for the market and its attempt to hold at this point and start working laterally and form the bottom.
Market Sentiment
VIX: 20.34; -0.79
VXN: 27.34; +0.21
VXO: 20.71; -0.67
Put/Call Ratio (CBOE): 1.06; +0.01. There is still a lot of hedging to the downside ongoing. The CBOE put/call ratio has topped 1.0 on the close 4 times in the past week. That along with the jump in the downside A/D ratio on NASDAQ and other signals we have noted this past week indicates that the selling is getting closer to running its course.
The put/call ratio can be looked at two ways. First, when the majority of options players lean one way or the other, that is often a signal that a change is in the works. It is another take on the old idea that when the majority all feel something is certain to occur the opposite is about to happen. Second, put options are used as hedges by big institutions that cannot move in and out of stocks easily and often because of the size of their positions and the associated transaction costs. The psychology, however, is no different. The big money managers on whole have shown they are no better at understanding the market ups and downs than individual investors. When they all start hedging to the downside, odds are the downside has just about run its course. Thus whether the high put/call ratio is attributable to option speculators, fund managers hedging, or a combination of both, the result is the same as far as we are concerned.
NASDAQ
On the low NASDAQ again touched lower, but managed to rebound for a modest gain on rising trade as it continues to hold in the middle of the last 2003 consolidation as it tries to put in a base.
Stats: +3.89 points (+0.2%) to close at 1943.09
Volume: 1.98B (+13.88%). Volume rallied in the afternoon both as NASDAQ sold off after the FOMC announcement and on the rebound from the lows. Could be attributable to expiration week, but we are not overlooking the action as showing the start of some positive price/volume action.
Up Volume: 1.16B (+1.006B)
Down Volume: 776M (-799M)
A/D and Hi/Lo: Decliners led 1.09 to 1. Even as the index swung positive the breadth could not match it. Still, it was basically flat as was the index.
Previous Session: Decliners led 3.92 to 1
New Highs: 45 (-19)
New Lows: 29 (+17)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tested lower after the FOMC results, but showed a solid 20 point rally off that low. It could not hold all of that bounce on the close but still managed a gain on rising trade. Good to see rising volume on a reversal from a test to a new low for the month and in the consolidation as that suggests some of the sellers were shaken out and buyers felt it was worth stepping in accumulating some stocks. It still has not set the bottom, but it has made a 142 point drop in the past 8 sessions on this third leg down since the January peak. It will be up and down from here with another test lower before it is over, but we have a feeling it is at or very near the bottom of this correction (11.7%). Indeed, after a lateral move and a bounce higher, we expect another undercut of this level before the downside is over.
For its part SOX made a fresh March low (470.01) but then rebounded to close over 475. That level is not a hard and fast support line, but as we have seen, a 5-point or so range around that level is acting as support. It still has a long way to go as well, but it has been very sticky around 475 the past week.
S&P 500/NYSE
Held 1106, a level that is becoming some important support, and bounced, but it could not attract rising volume.
Stats: +6.21 points (+0.56%) to close at 1110.7
NYSE Volume: 1.475B (-3.36%). Volume was a disappointment as it could not match NASDAQ's increase in trade as the large caps recovered from a test lower and bounced. It has yet to start showing a recovery in price/volume action that would be another signal that a bottom was being put in for this base.
Up Volume: 948M (+779M)
Down Volume: 495M (-855M)
A/D and Hi/Lo: Advancers led 1.42 to 1. Modest upside breadth matches a somewhat modest gain.
Previous Session: Decliners led 2.88 to 1
New Highs: 85 (+6)
New Lows: 19 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Solid action at the 1106 level that marks the May 2002 top as that point becomes more significant support. The large caps are trying to make a stand at this level after a hard thump lower last week on high trade as investors unloaded shares. After that hard drop it is no sure bet SP500 is going to hold here, but with SOX and NASDAQ showing signs of finding a bottom here SP500 is trying to use this support to start a lateral move to form its base. The drop has only been 5% here, and while it typically does not move with the same volatility as NASDAQ and SOX, this is a pretty tame correction. It could still easily test 1100 to 1096 where there is some support. If it fails at 1106 the next real support is 1075. That is an 8% correction from the intraday high.
DJ30
Working laterally below 10,250 and over 10,100 that is trying to exert some support. Not very strong, however, and 10,000 represents a minor shelf. Below that is 9859 to 9855, the tops from October and November that represent more significant support. The move higher was good to see but the volume did not track it, coming in below average. DJ30 has corrected 6.5% from its high (10,753). Similar to SP500, that is a shallow pullback given the gains. While NASDAQ will most likely do most of the heavy lifting in the correction (i.e., it will correct more than the other large cap indexes), DJ30 and SP500 most likely have more downside even if SOX and NASDAQ make bottom at the current levels.
Stats: +81.78 points (+0.81%) to close at 10184.67
Volume: 194 million versus 219 million Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The CPI is out before the Wednesday open giving us another look at the economy, this time from the price side to let us know if there is any inflation. Of course, it does not include the cost of education, and if you take out food and energy for the core, you are taking out one of the main price gainers the past six months that we all have to deal with on a daily basis. As we have noted in the past, low prices for computers, televisions and the like is nice and very necessary for our increasing standard of living, but we don't buy them every week or put money into an account every month so we can pay for them and their cost increases by the time we are ready to use them (as in school tuition). We don't expect the CPI to be a real market mover unless it shows a big spike.
Indeed, as noted above, we don't expect a lot of fireworks before the Friday closing bell unless something big and unexpected happens. Sure there will be volatility and we could see fresh lows along with tests higher as investors position themselves ahead of the expiration this week. The put to call open positions, however, indicate that the market will close out the week more or less in this range.
There is still a lot of doubt as to how far down the indexes will continue to sell. A look at the charts certainly does not instill a lot of confidence, but along with the charts we have been noting the sentiment indicators, breadth, general negative commentary about the economy and the market, etc. as indicating a bottom is trying to set up. It has not shown the conversion to solid price/volume action, however, that would be the clear indication to us that the bottom is mostly in place and that stocks are starting to build toward a breakout. This happened back in early 2003 as stocks worked on nice bases on good price/volume action while pundits moaned that the bounce from October was over and we needed to look out below. Until it makes that shift to better price/volume action, however, we cannot say that the tide has turned. It is showing signs of doing that, but it has not made that turn yet.
Thus we continue to look for those strong stocks that are already forming up nice bases even at this stage of the correction. The leaders in the next rally will emerge out of those stocks showing good accumulation and solid bases ahead of the pack. Not all of them will be leaders and not all of the leaders are already forming bases, but in each correction and recovery we see many of the leaders in that new run come from these early front runners.
Support and Resistance
NASDAQ: Closed at 1943.09
Resistance: The 10 day MVA (1980) could hold it back if it is not going to make a move. 1990 to 2000, the top of the late 2003 base. The exponential 50 day MVA (2021). The simple 50 day MVA at 2057. The March/December up trendline (2118).
Support: 1950ish is still trying to hold the index up. Mixed tops and bottoms at 1900.
S&P 500: Closed at 1110.70
Resistance: 1125 is the first resistance. The 10 day MVA (1125) and the exponential 50 day MVA (1129). The simple 50 day MVA (1138). The 18 day MVA (1132). The January high (1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support: 1106 is a May 2002 top and represents some early 2001 lows; it is holding well thus far. 1100 to 1096. 1075 to 1070 from a December consolidation.
Dow: Closed at 10,184.67
Resistance: The 10 day MVA (10,322). September/November up trendline (10,430). The exponential 50 day MVA (10,430). The simple 50 day MVA (10,536). 10,725 is the March 2003 up trendline. The January high (10,705).
Support: 10,000 to 9900-9850. 9859-9855 is the next real support
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
3-15-04
New York PMI, March (8:30): 25.33 actual, 38.9 expected, 42.05 February.
Industrial production, February (9:15): 0.7% actual, 0.4% expected, 0.8% January.
Capacity utilization, February (9:15): 76.6% actual, 76.4% expected, 76.1% January.
3-16-04
Housing starts, February (8:30): -4.0% (1.855M actual), 1.940M expected, 1.932M January (revised from 1.903M).
Permits, February (8:30): -1.5% (1.903M actua), 1.900M expected, 1.932M January (revised from 1.899M).
FOMC meeting: 2:15 results. Rates unchanged. Layoffs improving but job creation still lagging.
3-17-04
CPI, February (8:30): 0.3% expected, 0.5% January
Core CPI: 0.1% expected, 0.2% January.
3-18-04
Initial jobless claims (8:30): 345K expected, 341K prior.
Leading economic indicators, February (10:00): 0.1% expected, 0.2% January.
Philly Fed, March (12:00): 30.0 expected, 31.4 February.
End part 1 of 3
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