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money investment, Breakout test
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3/17/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: GILTF; ESMC; PD; RATE
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Stocks surge higher but volume struggles to follow.
- CPI in line, PPI finally to be released, mortgages surge.
- Indexes bounce to near resistance, but without stronger volume further upside is tough.
Stellar price gains, stellar breadth, lagging volume.
A familiar story Wednesday, though preferable to high volume selling. Stocks surged higher on strong breadth but low volume. The action is consistent with a market that is still trying to find the bottom of its correction. We have noted indications the selling was getting somewhat extreme, and the market has responded with three up sessions out of four, sandwiched around Monday that was down due to world events.
The upside, however, has not shown much strength. Indeed, other than a modest attempt at some accumulation on NASDAQ Tuesday, the upside has been on weak volume. That tells us that the big money is not committing yet. There is nibbling around the edges but no strong commitment yet. The sellers have backed off, and that allows the few buyers to run prices higher. We saw that last Friday as NASDAQ tore off 40 points to the upside on low trade. When stocks hit resistance or trouble arises, however, they can't handle it. We saw that Monday in the aftermath of the bombing and the election. With stocks facing near resistance as of the Wednesday close, we are going to see pretty quickly if they have any guts yet.
THE ECONOMY
Prices are somewhat tame even if you have to eat and drive your vehicle.
Consumer prices rose 0.3% in February, in line with expectations and lower than the 0.5% gain in January. Less food and energy (the core), prices rose 0.2%, more than the 0.1% expected and on par with the 0.2% January gain. By the government's measure, consumer prices remain tame and that is another reason the Fed can justify keeping interest rates low.
Energy prices climbed 1.7% after a 4.7% jump last month. Transportation costs were showed the second highest rise at 0.7% (2.5% jump in gasoline; 8.1% in January). Medical care +0.6%, education +0.3%. The same areas keep rising.
The longer term perspective remains positive. Core prices rose 1.2% year over year, the lowest since 1966. Again, however, items that are rising in the 2000's are different from the 1960's. Medical costs and education costs are the ones everyone knows. Commodities continue to surge. As the building blocks of the economy, their rising prices are a continued indication that there could be inflation down the road that is being baked in now. If the Fed responds and raises rates too high, however, that could stifle the expansion. The Fed can raise rates and have no effect (real rates of interest are below zero now), but the Fed has a very poor track record. Once it starts raising rates it cannot seem to stop until it does damage. Thus between the two we would just prefer the Fed not to get involved just yet.
Mortgage applications surge 25%.
Low rates are the grease that makes the housing market run. Whether Greenspan's comments a few weeks back about variable rate mortgages saving owners thousands of dollars has anything to do with it or not, it is clear that citizens are going back to the mortgage banker. Refinancing jumped 40% while new purchase mortgages lagged at 5.6%. Overall applications rose 25%. Again, low rates create their own demand for loans whether mortgages, personal loans, revolving credit, etc. That has been and continues to be a boon for stocks.
PPI ready to be released.
Get ready, don't get too excited, but the January and February PPI are going to be released Thursday. After fighting data rejection by the software for over two months the feds feel they have the problem licked and the data ready to release. We can say that our anticipation of this release is less than breathless.
THE MARKET
NASDAQ rallied to the 10 day MVA and SP500 is back at 1125, the near resistance after getting bombed lower last week. A nice rebound with gains 3 of the last 4 sessions. The gains have been on lackluster volume, and that shows the big money is still predominantly on the sidelines.
That also means that the indexes will have trouble getting through resistance unless buyers do come in. If they did not enter on the recent lows prior to this run, however, are they going to enter after this bounce? That remains to be seen, but without rising upside volume, rallies often fizzle. Indeed the action on NASDAQ, while showing some modest attempt at accumulation Tuesday, looks like a typical weak bounce toward near resistance where it will struggle.
This action is not out of line with what we have seen and discussed the past week. The market has been showing signs the selling was washing itself out. The market bounced after getting kicked around, coming up for some air. It can fail in this bounce and still be on the road to forming the bottom and starting that lateral move in its base. We would prefer to see it move higher for the rest of the week and into next week, then make another test after it has established something of a beachhead to the upside, something to test back off of. If it rolls over and higher volume selling resumes, the recent bottom attempts will be hard-pressed to hold up.
Overall we cannot say we love the action we are seeing, but there has been some change in the wind, and it is not just in these low volume rebounds. Rising volatility, high put/call ratio, big downside breadth. They were getting to high levels on the selling, foreshadowing that the selling was getting overdone. The market has bounced since then, and though volume has been so-so, there have been modest accumulation attempts. Tuesday it was NASDAQ, Wednesday it was SP500 posting modest volume gains on a price rise. Now it has to continue the work on making the recent lows the bottom with either continuing the move higher here to establish that beachhead, or if it falls it needs to do so on overall low volume and hold near the recent lows. We cannot lose sight that the market is still deep in the process of base building. It is not about to rally to new highs from right here; it if does, it will fail unless some earth shaking news hits and stocks rally and don't look back (e.g., capture of OBL). It needs to continue the lateral, let stocks finish their bases, then play follow the leaders when they are done.
Market Sentiment
VIX: 18.11; -2.23
VXN: 24.75; -2.59
VXO: 18.14; -2.57
Put/Call Ratio (CBOE): 0.81; -0.25. After four sessions closing over 1.0, the ratio drops on a strong price surge. It did its job near term, starting a rebound. Now we see if the rest of the market can respond in kind.
NASDAQ
Rallied to the 10 day MVA in an impressive price move but on no volume. Obviously would have liked to see more modestly higher trade again as the techs rallied.
Stats: +33.67 points (+1.73%) to close at 1976.76
Volume: 1.702B (-14.04%). Volume was woefully light versus the strength of the price gain. After a modest accumulation attempt Tuesday, this low volume was just another version of a low volume relief bounce.
Up Volume: 1.4B (+240M)
Down Volume: 280M (-496M)
A/D and Hi/Lo: Advancers led 2.91 to 1. Strong upside breadth accompanying the price gains. It was not just a few large caps leading NASDAQ higher. That is a necessary part of any recovery, but it will ultimately need that stronger trade to make the moves stick.
Previous Session: Decliners led 1.09 to 1
New Highs: 72 (+27)
New Lows: 14 (-15)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Strong futures helped NASDAQ gap higher. It never really threatened a sell off as it held its gains in lateral moves when it was not rallying. Very bullish action, closing right at the session high but the volume tells the real character. It tapped the 10 day MVA (1980) on the high and backed off slightly to close. That is a pretty obvious indication there is some resistance at that point. It would be very constructive for NASDAQ to rally through and close above the 10 day in this action as it does not want to establish the 10 day as resistance. That is a level that sets up as resistance in downtrends. For now it has made a decent rebound from some quite oversold conditions. It and many of its stocks are not in position to breakout to the upside, but we want to see it continue solid building action, holding the recent lows and working laterally along with an improvement in the price/volume action. It is making an attempt, but it has much further to go.
SOX bounced as well, but as noted, many of its components rose on low volume as well. It has made a very small double bottom and cleared the 10 day MVA on this move. A rally to 500 before testing back again would be very good for the index, the one we think is broadcasting the leading signals for the rest of the market because it sold first and it found this support first and has started a lateral move.
S&P 500/NYSE
A nice price move as well, rallying up to near resistance on slightly rising volume.
Stats: +13.05 points (+1.17%) to close at 1123.75
NYSE Volume: 1.496B (+1.45%). Similar to NASDAQ on Tuesday, NYSE managed some modest accumulation with a volume gain coupled with a price gain. The volume was still below average and was not proportional to the solid gains posted by SP500 and the small and mid-cap indexes.
Up Volume: 1.206B (+258M)
Down Volume: 784M (+289M)
A/D and Hi/Lo: Advancers led 3.26 to 1. Outstanding breadth.
Previous Session: Advancers led 1.42 to 1
New Highs: 140 (+55)
New Lows: 13 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Gapped higher and ran to near resistance at 1125 before backing off on the close. Indeed, the last minute fall pushed it back below the 50 day MVA (1125). This move had a little more backing, and that could give it enough mustard for a further move up to the 50 day MVA (1127; wow, big jump, huh?) or the 18 day MVA (1131). 1125 is a serious resistance level, however, and SP500 has a fight on its hands to clear and hold it. It has only made one 5% move lower in this pullback. We think it has another leg lower to test 1106 again, but as with NASDAQ we would prefer to see it log some more gains on this bounce before it makes that test.
DJ30
Low volume rally continues with the blue chips posting a nice 115 point gain. The second day of a bounce (the third in four sessions) tapped the 10 day MVA (10,318) and then faded slightly to close. Similar action to the other indexes. We would like to see it higher on this bounce, up toward the 50 day MVA (10,425), but as with SP500 this is only the first leg lower, and before this is over 10,000 looks to be tested, and even lower down to 9859 to 9855, the tops from October and November.
Stats: +115.63 points (+1.14%) to close at 10300.3
Volume: 181 million versus 194 million Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
LEI, jobless claims, Philly Fed, and yes, the January and February PPI. They are all important, and a solid reading from them could push the indexes higher on this bounce, just what we want to see. Again, we want to see stocks establish a higher beachhead on this bounce before making the next pullback. That gives it a better chance of holding the recent lows and using them as support for continuing to form the bottom to the current correction. DJ30 and SP500 could slide lower, but they are not as far into their correction as SOX and
NASDAQ. The latter two are the ones we are really watching to hold on the next pullback and thus continue building the March lows as the bottom.
We reiterate that the market is not ready to make any breakout to the upside. The majority of stocks, while still in longer term uptrends, are still in the process of basing out and preparing for the next rally. This is where the gains are worked off as the sellers get out and the buyers pick up their shares. If it shows the right attributes, e.g., price/volume action turning to accumulation and solid bases forming, then we get ready for a broader move higher.
In the interim we look at those stocks that continue to perform very well versus the market. By that we mean already in good patterns, testing breakouts from solid bases, and new entry points on existing plays that are working well.
Support and Resistance
NASDAQ: Closed at 1976.76
Resistance: The 10 day MVA (1980) held it back Wednesday, and if no volume comes in it is a problem. 1990 to 2000, the top of the late 2003 base. The exponential 50 day MVA (2019). The simple 50 day MVA (2056). The March/December up trendline (2121).
Support: 1950-1943 held as the recent lows. Mixed tops and bottoms at 1900.
S&P 500: Closed at 1123.75
Resistance: 1125 is the first resistance. The 10 day MVA (1125) and the exponential 50 day MVA (1128) and the 18 day MVA (1132). The simple 50 day MVA (1138). 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 10,300.30
Resistance: The 10 day MVA (10,318). The exponential 50 day MVA (10,425). September/November up trendline (10,435). The simple 50 day MVA (10,531). The January high (10,705). 10,750 is the March 2003 up trendline.
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% actual, 0.3% expected, 0.5% January
Core CPI: 0.2% actual, 0.1% expected, 0.1% January (revised from 0.2%).
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.
PPI, January and February: Who knows what the new format will reveal.
End part 1 of 3
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money investment
Breakout test
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