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world stock market, us stock market
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3/18/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: None issued
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Fall back from near resistance reverses on potential good news.
- Jobless claims hit a low, Leading Indicators flat, the 'new' PPI jumps.
- Despite the gyrations around the terror news, market still working its consolidation.
- Subscriber Questions
Market was fading from resistance when potentially good news hits.
After a low volume bounce to the 10 day MVA stocks were turning back, ready to test the lows in the correction once more to try and work on setting the bottom. No buyers were evident for the first 3 hours of trade as stocks solid in a steady 45 degree angle lower. A good initial jobless claims report could not buoy them while a wildly higher new version PPI and lower than expected LEI added fuel to the downside.
Volume was running low again, the one small silver lining. At 12:35ET reports came out that a 'high value' AQ target was surrounded in Pakistan. That braked the selling and started some short covering and SP futures buying. The market anticipated OBL and rallied higher. 45 minutes into the move it was announced it was the #2 man. That stalled the move even though this guy is probably more involved and more dangerous than OBL because he is very intelligent, has been the major force behind AQ's major attacks, and is thought by most to be running AQ as OBL is in ill health. The market seemed to digest that thought over the next hour and one-half as it turned back up and pushed to new highs. That shows the import of OBL as at least a key figurehead even if he is not as involved in operations. Take out the #2 man, however, and that is a key blow to AQ.
Few wanted to be short, but not enough to push SP500 through 1125. It tapped that level on the high but faded in the last half hour. Again, shorts were getting out of some short positions just in case there was a capture as opposed to a surge in the longs buying. The rally back up was good to see, but in the end the indexes showed dojis once again right below the near resistance. The charts thus still show stocks working in the correction.
THE ECONOMY
Jobless claims hit a 3 year low.
366K was better than the 345K expected and down from 342K the prior week. That brought the 4-week average to 344K, down from 346K. All of these are the lowest reading since early 2001. Continuing claims edged higher to 3.06 million from 3.02 million. That number is significantly lower the past month. While that is a reflection of some hiring (perhaps contract versus fulltime as the non-farm number reports), it also shows some workers falling off the rolls as benefits run out. Thus you cannot look at it and say it looks just peachy. Still, this is how the jobs market recovers; it would not be this low if more and more workers were not finding some work.
The contract issue is still the big one with respect to the jobs recovery. Outsourcing gets the press because it is easier to blame someone 'over there' or target 'corporate loopholes' than to own up to what is really happening and why companies look overseas at all. The economy is growing significantly but companies remember what happens when you get too aggressive and forget that all up cycles come to an end. They learned the hard way in 2000, and many did not survive to make amends. Those that did are not going to let it happen again, at least not yet.
Thus they are loath to take on large increases in overhead that full-time hires bring. Benefit costs are huge. Companies are in the process of changing employee views toward health insurance, and we have no doubts that over the next 10 years these expensive co-pay, low deductible plans will be replaced with the HSA-style high deductible policies where the employee will pay more of the premiums but be able to write off those premiums against income taxes. That is over 10 years, however. Employees are not used to that idea, and thus companies are going the cheaper route, i.e., hiring skilled workers on a contract basis and letting them handle their insurance needs.
Dell is doing this right now. It runs contract workers in and out as needed. It is using contract workers for specific projects or when demand increases, but as soon as they are done or the demand wanes they are cut loose. This is one of the key ways Dell is still able to squeeze out better margins and earnings. Its market is not growing but it is stealing market share and being as efficient as possible. Companies all over the country are doing the same thing, and thus the non-farm payroll number remains lower than normal given the level of economic activity.
Leading Economic Indicators flat.
This was one of the very few months of no increase in this leading indicator in the last 9 months. It projects growth 6 months out, and the trend has been a solid steady increase. January was up 0.4% (revised from 0.5%), showing a very solid increase in activity. Again, the trend is still very much positive, and we expect it to continue.
Philly PMI follows New York PMI, slides lower in March.
30 was expected, 24.2 was reported. While disappointing to a certain extent, it was also the tenth consecutive positive month. Anything above zero indicates expansion. Employment edged slightly lower (12.3 from 12.5) while new orders inched higher (21.9 from 21.8). March has been a somewhat sluggish month, but it comes after a string of very strong months. Just as with any trend, there periods of strong gains and periods of slower gains. A lower month does not mean the trend is over.
PPI jumps.
The January PPI jumped 0.6%, the core rose 0.3% after falling 0.1% in December. This was the first report with the adjusted industry classifications and investors did not know what to do with it. The Labor Department said the adjustments did not affect the report. It remains to be seen how the changes impact the monthly reports. With the rising cost of commodities and other materials, however, one can hardly doubt that producer prices are increasing.
THE MARKET
After the low volume test of near resistance, stocks were backing off Thursday. Volume was light early on, a silver lining to the renewed selling. It gives some indication that perhaps the recent lows, at least on NASDAQ and SOX, will try to hold as the bottom of the correction. DJ30 and SP500 may have further to fall because they got a late start on the selling. Even as volume rallied on some of the short covering, volume still closed lower than Wednesday. In short, there was very little volume on the early selling. Moreover, even though the market sold, overall trade was low, indicating no distribution the last two times NASDAQ sold.
Even with the rally, NASDAQ, DJ30 and SP500 closed below near resistance, showing dojis just below key levels. Technically that is a signal that the bounce higher has run out of gas. Coupled with lower volume on the ascent, they are all the more stronger signals. Even with the capture of the baddest guy in AQ potentially at hand, there was not enough upside action to push through this resistance. Thus without outside news such as this guy's capture, the market is set to drift lower into the Friday close given the lower trade and the evenly matched index options around this SP500 level.
The lower volume pullbacks this week are an improvement in price/volume action. Remember, we are looking for the p/v action to switch from distributive (higher on down sessions, lighter on up sessions) to accumulative (up on rising sessions, down on declining sessions) as signal that the tenor of the correction is changing and stocks are building toward a breakout. As with all changes in trends, before it turns clearly positive there is a period where it is not clearly distributive, not clearly accumulative. It is starting to show that action with NASDAQ showing some modest accumulation Tuesday and SP500 doing the same Wednesday. The selling sessions have been lighter as well. A start, but not there yet.
Market Sentiment
VIX: 18.53; +0.42
VXN: 24.58; -0.17
VXO: 18.62; +0.48
Put/Call Ratio (CBOE): 0.80; -0.01
NASDAQ
Never really challenged the 10 day MVA even with the recovery. A very mild, low volume pullback after the Wednesday jump, but it was helped by the world events.
Stats: -14.32 points (-0.72%) to close at 1962.44
Volume: 1.685B (-1.03%). Volume eased back slightly on the pullback and remained still well below average. Indeed the past 5 sessions have been below average. The only solid volume session NASDAQ reversed off the lows for a modest gain. After the high volume selling this is starting to show a much better flavor even if the low volume occurred on some of the up sessions. It is now occurring on the down sessions as well. A transition? It is looking like one though it is still early.
Up Volume: 482M (-918M)
Down Volume: 1.192B (+912M)
A/D and Hi/Lo: Decliners led 1.55 to 1. Very modest downside breadth.
Previous Session: Advancers led 2.91 to 1
New Highs: 75 (+3)
New Lows: 20 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The chart shows a low volume bounce up to the 10 day MVA (1976) after some high volume selling to start the month. That is the typical stuff downtrends are made of. NASDAQ has definitely not altered the trend lower, but after some sentiment and internal indicators reached toward extreme levels the index held its ground and is trying to show a change in character with a higher volume up session and some lower volume down sessions. It is not there yet, and it may resume more selling before it finally does hit bottom, but this is how the change starts.
Indeed, we are looking at Tuesday as a potential turn in the action on NASDAQ. That session NASDAQ undercut the recent lows but managed to rebound and close positive on rising volume. That sets the clock for a reversal and a follow through. That means we are looking for the follow through to occur Friday to Wednesday to tell us that the index is ready to start building toward a breakout. A follow through is a 1.5%, 2% or better gain on strong volume; above average volume is best. That sets the stage for a further rally and breakout. Given that many stocks are still building bases and not ready to breakout, at best we get follow through and spend the next few weeks building the right side of NASDAQ's base. After that a slightly pullback and then a breakout. By that point stocks will be ready to breakout from strong bases. We are not holding our breath that this produces any strong break higher, but as always, you have to look at the bare facts the market is showing, put your beliefs on the back burner, and let the market lead the way.
S&P 500/NYSE
A hanging man doji below the 10 day MVA as volume ran light. It too was fading off the 10 day before the terror news hit that brought it back up to that level.
Stats: +0.06 points (0%) to close at 1122.32
NYSE Volume: 1.364B (-8.86%). Significant drop in volume, and it was down as the index sold early in the session. Recall that Wednesday SP500 posted a gain on rising trade, a modest accumulation session on the heels of NASDAQ's slight accumulation Tuesday. While the lower volume doji indicates a pullback, the renewed accumulation mitigates the action somewhat.
Up Volume: 578M (-628M)
Down Volume: 760M (-24M)
A/D and Hi/Lo: Decliners led 1.25 to 1. Even with the smaller caps under the gun the declines were modest overall.
Previous Session: Advancers led 3.26 to 1
New Highs: 132 (-8)
New Lows: 13 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Hanging man doji below the 10 day MVA (1124) with the 50 day MVA (1127) acting as its backstop. That would suggest a pullback ahead. As noted, however, Wednesday's accumulation session is a positive turn for the index. While a pullback is indicated from the Thursday action (without any external influences), the beginning of a turn in price/volume action suggests it may lose some of its aggressiveness. Still has some correcting to do, and a trip to 1106 again seems the lightest pullback in the cards.
DJ30
Similar to SP500, the blue chips are showing a tight hanging man doji a the 10 day MVA (10,314). Unlike SP500, the rally up to this point was on low volume (no Wednesday accumulation session) and the Thursday doji was on surging, above average trade. That is more suggestive of a reversal: few buyers as it moved higher, then a big churn below resistance. Another test to 10,000 or 9850 before this is over still seems likely.
Stats: -4.52 points (-0.04%) to close at 10295.78
Volume: 219 million versus 181 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Volume has been extraordinarily light for an expiration week, particularly a quadruple witching week. Thus we should anticipate stronger trade Friday along with some volatile action. There are several factors at work on top of the expiration. First is the fairly evenly matched outstanding put and call positions on the indexes, particularly the SP500. That suggests a close within 5 points either side of key SP500 resistance at 1125. Second there is the ongoing action in Pakistan. Air strikes are scheduled for dawn (about now), and there may be no word until the weekend. That leaves a lot of event risk tied to the downside positions. That could cause a rally on any selling in the market as shorts use any pullbacks to close positions, and that sets off a rebound itself. Third, if there is a capture or a kill confirmed during the market, that would ignite upside. Thus the action could be volatile, even more so for an expiration Friday that has seen little volume this week.
Bigger picture is a market that is still working through its correction after a strong 2003. It takes a while to work off such a rally, and it looks at best as if the market is currently forming the bottom to its consolidation of those gains. Stocks still have to complete their bases and set up for the next move. At the same time there is NASDAQ that has a potential follow through coming. We will have to see how the modest turn in price/volume action develops into, but there is some promise there, more than many are giving credit to.
That keeps us playing it conservative still, looking for solid patterns that can provide breakouts but not moving in unless there is super action on the break higher. It is not a time to get overly aggressive in either direction as the indexes show some action that suggests they are trying to put in that bottom.
Support and Resistance
NASDAQ: Closed at 1962.44
Resistance: The 10 day MVA (1977). 1990 to 2000, the top of the late 2003 base. The exponential 50 day MVA (2017). The simple 50 day MVA (2054). The March/December up trendline (2123).
Support: 1950-1939 held as the recent lows. Mixed tops and bottoms at 1900.
S&P 500: Closed at 1122.32
Resistance: The 10 day MVA (1125). Price resistance at 1125. The exponential 50 day MVA (1128) and the 18 day MVA (1131). 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 has held thus far. 1100 to 1096. 1075 to 1070 from a December consolidation.
Dow: Closed at 10,295.78
Resistance: The 10 day MVA (10,315). The exponential 50 day MVA (10,420). September/November up trendline (10,440). The simple 50 day MVA (10,526). 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): 366K actual, 345K expected, 342K prior.
Leading economic indicators, February (10:00): 0.0% actual, 0.1% expected, 0.4% January (revised from 0.5%).
Philly Fed, March (12:00): 24.2 actual, 30.0 expected, 31.4 February.
PPI, January: 0.6% actual, 0.4% expected, 0.2% December (revised from 0.3%)
Core PPI, January: 0.3% actual, 0.1% expected, -0.1% December.
SUBSCRIBER QUESTIONS
Q: I've heard that it's not a good idea to short stocks with small floats, but don't really understand how this works. What exactly is the "float" of a stock and what should we be looking for in terms of shorting a stock relative to its float? Thanks for your valuable help.
A: A stock's float refers to a company's shares that are freely bought and sold without restrictions in the public, i.e., the number of shares held by the public and available for trading. As the largest proportion of stocks trading on the exchanges, the float consists of regular shares that many of us will hear or read about in the news. [Authorized shares refer to the largest number of shares that a company can issue, whether as public shares or for use within the company only, and the number of these shares is determined when the company is created. Outstanding shares are shares that have actually been issued and includes restricted shares that are usually reserved for employees as part of salary packages or benefits.]
With those definitions established, it also helps to know just what a short squeeze is. As a stock starts to rise quickly, short sellers may try to liquidate (cover) their positions by buying the stock. If enough short sellers are involved, the price gets pushed higher and higher the short squeeze. Consider then the situation with a stock that has a small float, or, a smaller number of unrestricted shares available for public use. With even fewer shares available, it would be harder to get out of the position without the chance of losing more than you would have gained had the stock fallen as hoped.
Before shorting, evaluate how the float and short term influences such as news surrounding a company could affect a position. Since short squeezes tend to occur more often with the stocks of small cap companies with small floats, they would be riskier positions to take for kind of play. The smaller number of available shares exacerbates the situation as short sellers race to close positions as the stock moves higher.
End part 1 of 3
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world stock market
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