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world stock market, us stock market
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3/20/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: None issued
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:
- 'Normal' expiration turns ugly late.
- PPI revisited: manufacturers forced to stock up on raw materials as prices rise, availability falls.
- Semiconductors tank, putting the market at risk of a deeper test.
Last hour drop sets up an interesting week.
We expected the up and down action below near resistance after a mostly low volume rally to that point combined with expiration Friday. What looked like a good open pre-market, however, never got off the ground. The Taiwan president was shot, bomb threats in Washington DC schools, and Pakistan reports that maybe the AQ number 2 man was not in the compound under siege after all. That pressured stocks from the open.
The market held up pretty well early, however, all things considered. Indeed, it was giving us exactly what we anticipated until the last hour when the sellers really jumped on board. Modest losses ballooned to 1.1% drops on the large cap indexes as NYSE volume climbed. That was palatable, however, as the indexes held well above their March lows, NASDAQ volume backed off, still well below average, and breadth was just modestly lower thanks to a relatively strong performance by the small caps (-0.5%). That kind of action is in line with expiration Friday and can easily be reversed the following Monday.
The SOX was a different bag of worms. SOX was the first to sell off in this correction and the first to hit that second level of support. It was making a stand at the September and October highs, working laterally for the past week at that level. Friday it broke that support and tanked to the 200 day MVA with a whopping 3.6% loss. How it behaves at the 200 day will tell much about the rest of the market. We said the correction would need two good scares or tests lower than most expected, but we wanted a further upside between them. The Friday action on SOX could mean that the first run lower before a sustained bounce is not over.
THE ECONOMY
During the long business downturn we reported many times on specific problems that the real world businesses were experiencing as opposed to what the ivory tower types discuss on the financial shows. A real sign of the change in the business climate involves commodities, raw materials and the like. While in the downtrend prices fell lower and lower with stocks bulging, the producers were hurting. The manufacturers using the products were hurting as well, but at least prices were low. Deflation was very real in many materials industries, e.g., lumber and forest products.
Times have changed dramatically. What we are hearing pretty clearly demonstrates that deflation is no longer a problem but that inflation is preparing to replace it as a problem. Short term a little inflation is a decent thing given there was deflation in the raw materials markets. If supplies are too constrained vis- -vis demand, then you have textbook inflation potential. We discussed this last year regarding the need for strong business side demand stimulus in order to get the supply side up and running before demand got too far ahead and chased supply. Consumer demand was strong and optimism was growing while business capital investment was modestly increasing.
After being burned by the sudden downturn, however, businesses are still reluctant to increase production enough to really jump inventories higher. Yes, they have been increasing monthly, some months quite solid, but no blowout production. One of the problems is scarcity of materials. There has been a huge jump in demand and consequently pricing for soft and hardwood lumber. Manufacturers were keeping very low stocks on hand because supply was plentiful and prices were falling: why tie money up inventorying product that was falling in price? They could always buy futures to ensure supply and protect against cost spikes. Producers were awash in lumber that was not being used up despite the housing boom and they slowed production while the buyers stopped buying to use up stockpiles of inventory here in the US.
In a rather short time span, however, demand has jumped. Hardwoods used to make furniture, cabinets and the like have jumped in demand. There is little stockpile here in the US, and believe it or not, finding transportation (ships, barges, log rafts) is difficult, and that means higher shipping costs, another price increase. As a result, overall prices appreciated 40% in 3 months. Because of now low supplies both suppliers and manufacturers are buying more than usual. First, they need to make sure they have stock on hand (suppliers to sell, manufactures to make their goods). Second, they are buying more than usual because it is really a problem getting supply and price will be higher tomorrow.
Thus you have two results. Demand is outstripping supply, a classic inflation equation. The key is how out of whack the supply to demand ratio gets and how long it persists. A little inflation is good; it often leads to ramping up production to meet that demand, and as long as there are no impediments to cash flow and investment, supply typically meets demand. Second, inventories are being built back up. They are not surging, but with this type of supply/demand ratio it is definitely strengthening and looks to continue. Further, the industrial production numbers continue their solid advance. The pieces are still coming together nicely in a very solid economy.
What could turn some good re-inflation into deleterious inflation? Removing supply side incentives. The key is to keep supply unfettered to allow it to meet demand wherever it is. When supply is restrained through lack of money (high rates, low money supply, high tax rates that lead to less investment because of increased risk), then you have the bottlenecks develop that even restrict supply more than it has been due to reluctance to expand after a nasty plunge in business activity. It is good to see members on both sides of the aisle saying let the economy grow with the current tax cuts and even some more small business incentives. The key to resolving economic problems is growth in both supply and demand. We need to foster an environment of continued risk taking. That is what makes us great, not relying on the government to 'create' jobs.
THE MARKET
Up early down hard late. Not the ideal action for a healthy market, but then again, for the past 2 months the market has been correcting. It has shown signs of improving action, kind of a transition attempt, but thus far no significant character change. NASDAQ is still in the game for a follow through attempt, but it is just the first attempt to rally after three legs down.
We have been watching SOX as the leading indicator for the market. It rallied a bit better late in the move, it sold a bit quicker when things peaked in January, it cut through to the second level of support first, and then it started to move laterally there while the other indexes were still feeling around for their support. Friday it was hammered out of proportion to the rest of the market, dropping 3.6%, crashing through the bottom of its recent range, and landing hard on the 200 day MVA (462.59). Chips such as INTC, AMAT, KLAC, XLNX, and AMAT sold on spiking volume, either continuing downtrends or cutting through key levels such as the 200 day MVA.
The 200 day is very key to the life of a stock. It is an important institutional support level. When a stock breaches the 200 day MVA it means the institutions are not willing to support it. When it breaches on strong volume, they are not only refusing to support it, they are actively getting rid of it. INTC is below its 200 day as is AMAT just crashed the party, while MCHP, KLAC, LLTC are trending lower after breaking that level already. Some key names are not being supported by the big institutions. Others are holding up, but many that were in orderly corrections like the index are now dumping harder and are back in the process of bottom finding.
A key sector of the market has completed something of a head and shoulders pattern with a dramatic drop through the neckline. It is still holding an important level at the 200 day that is also some support from prior price lows in April of 2001 and May of 2002. This week will be a critical week to see if it can gain some support.
The rest of the market sold as well, but the other indexes are still holding comfortably above their recent lows. The question now becomes whether they can hold up the SOX or if it continues to be the leading indicator for them. Again, an important week just when the indexes were showing some signs of holding the line and starting to put in the bottom. They can still do it, but they are not getting help from a key area.
Market Sentiment
VIX: 19.15; +0.62
VXN: 25.99; +1.41
VXO: 19.16; +0.54
Put/Call Ratio (CBOE): 1.03; +0.23. Another close over 1.0, the fifth in the past two weeks. A continuing indication that the negative sentiment remains high. For now the market is living up to that sentiment, but this heightened level of downside expectations is one of the elements that leads to the end of the downturn.
NASDAQ
Tapped the 10 day MVA but then rolled over to continue the slid lower though volume declined on the selling once again.
Stats: -21.97 points (-1.12%) to close at 1940.47
Volume: 1.654B (-1.85%). Another lower volume selling session. Despite the rollover and further selling on SOX as well, volume is not revving higher again, and that is still a real positive.
Up Volume: 402M (-80M)
Down Volume: 1.222B (+30M)
A/D and Hi/Lo: Decliners led 1.56 to 1. Again very modes downside breadth on a pretty substantial price drop.
Previous Session: Decliners led 1.55 to 1
New Highs: 82 (+7)
New Lows: 18 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The late selling hurt the index, but it did not undercut the Tuesday low (1927.69). That keeps alive that day as a potential reversal session along with the fact that volume was lower and still significantly below average. It will have to spark up sometime between Monday through Wednesday and produce a strong price gain coupled with strong volume to provide any follow through to Tuesday's reversal and slight gain on rising volume. With the SOX action the odds are not as good (they were not that great anyway) that NASDAQ will find the strong buyside strength just yet. Its important test this week is whether it holds the recent low (1927) and continues the work on forming the bottom that is trying to emerge at this level. One thing to consider is that NASDAQ is now just 3% over its 200 day MVA (1884). When it started the correction it was 20%, the point it historically starts to correct. It is getting closer to a bottom, but it still has to show it has hit, and a follow through would start the building process.
S&P 500/NYSE
Still holding well above its recent lows after tapping near resistance, but selling again on rising volume.
Stats: -12.54 points (-1.1%) to close at 1109.74
NYSE Volume: 1.437B (+5.36%). Still below average but once again rising as the index sells. We have been looking for price/volume action to swing neutral (ceasing the higher volume selling) and then turn positive (rising on up sessions, falling on down sessions). Friday's action was a step back after a slight improvement in the p/v action, but we also have to consider it was an expiration Friday. That tends to bump volume higher, and the fact that volume was still below average makes this a pretty mild distribution session.
Up Volume: 340M (-238M)
Down Volume: 1.073B (+313M)
A/D and Hi/Lo: Decliners led 1.6 to 1. As with NASDAQ, very tame downside breadth given the size of the loss.
Previous Session: Decliners led 1.25 to 1
New Highs: 126 (-6)
New Lows: 11 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped at the 10 day MVA (1122) again just below price resistance at 1125 and then rolled over toward the 1106 level that held up on the close the last test just a week back. Looks as if that level will get another chance to try and hold the line this week given the reversal and downside momentum. Given that Friday was expiration and volume was still below average anyway, volume levels on any further selling will be key. SP500 was showing some better price/volume action, and if Friday was just related to expiration and volume subsides again, that is another positive sign that the selling is starting to abate. Nonetheless, SP500 still has not corrected significantly (5.5%) on this move, and we still anticipate it will test lower. With SOX breaking support, there is a lot of pressure on the rest of the market. Another test of the March lows appears in the cards, and below that toward 1075 during this correction.
DJ30
The blue chips turned over at the 10 day MVA (10,291) as well, turning lower again after a low volume rebound from the heavy selling two weeks back. Volume was not tame. It surged back to levels encountered on the last round of selling, jumping well above average as INTC and MSFT sold on above average volume. Another test of the recent lows (10,092) appears set, and as noted last week, a test to 9850 before the pullback is over.
Stats: -109.18 points (-1.06%) to close at 10186.6
Volume: 262 million versus 219 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
We will have to see how the Pakistan battle plays out over the weekend as that could have a significant impact on how stocks trade to start the week. Already Friday there were reports that the key person had escaped, that maybe he was not there, that many of the fighters were speaking the local dialect and may not all be AQ. The market was somewhat disappointed with those hints and rumors as the Thursday afternoon rally was washed away.
The market will get some economic guidance but the reports don't really kick in until Wednesday. GPD is on Thursday and personal income and spending are out Thursday. The market will no doubt be well into its test of the March lows before the economic data hits. Moreover, the real economic data that can move the market is out the following Friday with the March employment report. Once again the market will turn to that as the key driver. It ahs become more than just a measure of job creation. Many view it as a barometer of the presidential race. If jobs start to jump significantly, the last complaint about the economy will be mooted and one of the main attacks on the current administration is put to rest. Thus the jobs report has multiple effects that the 'normal' jobs report does not and is all the more watched.
Thus the economic data this week most likely will not push the market much. The market started to roll over again Friday from near support, and we will have to see if the higher volume on DJ30 and SP500 was an expiration event, whether NASDAQ continues its improved price/volume action, and if SOX can hold up at the 200 day MVA. For it to do that, something has to reverse the trends of the leading chips that make up this rather narrow index. That would be good news from Pakistan. If not that, it may be that the market languishes and tests lower until the jobs report.
Further selling to the next support would perfectly set up a bolt higher on a good jobs report, but we are not anticipating March will produce the breakout month. April looks to be the earliest, but we are still not seeing the kind of peripheral indications that spell hiring has significantly climbed. The Paychex CEO Friday said that the company was getting more and more small business clients and hiring workers, but the clients are not increasing their payrolls. Of course, the rise in accounts suggests what we have discussed before, i.e., the rise in small business start-ups. Indeed, there has been a 30+% jump in LLC (limited liability corporations) creation. As the Manpower CEO noted last week, this is always a sign the employment picture is recovering, but it is also still at the beginning of the cycle. All boiled down that means though the market may be set up for a bounce at the time the employment data comes around, it most likely won't get the upside catalyst.
Given this we are watching the test lower closely and are focusing on more downside action as well after stocks made a few days of rebound but are stalling out. The majority of stocks are still deeply mired in base forming, not ready to make breakout moves and still needing work. We will keep a close eye on how NASDAQ responds to the recent lows, how SOX reacts at the 200 day MVA, and what volume does. At this stage of the correction, however, the indexes and most stocks are still working on finding the bottom and not ready to make breakouts from sound bases. While we continue to look at those upside plays that are forming strong patterns, we don't want to push a so-so pattern just to try to get in on an upside play.
We see many stocks setting up, but we also pass on them if they don't give the right kind of move. When picking stocks you are always going to find good looking plays that don't work out. We don't like to buy until we see the stock making a move that is worthy of our money, and that typically means a strong volume move. That shows us the stock is attracting a lot of buyers, and they most likely won't turn and immediately sell the stock. If it does not show us that volume or make the breakaway move, we will let it pass. Again, a stock has to show it is ready to make the move higher, and it does that when a lot of buyers pile into it and break it out of a pattern, break it through resistance, or bounce it up off of support.
Support and Resistance
NASDAQ: Closed at 1940.47
Resistance: The 10 day MVA (1970). 1990 to 2000, the top of the late 2003 base. The exponential 50 day MVA (2014). The simple 50 day MVA (2051).
Support: Recent lows (1939 closing, 1927 intraday). Mixed tops and bottoms at 1900.
S&P 500: Closed at 1109.78
Resistance: The 10 day MVA (1122). Price resistance at 1125. The exponential 50 day MVA (1127) and the 18 day MVA (1128). 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 10,186.60
Resistance: The 10 day MVA (10,291). The 18 day MVA (10,367). The exponential 50 day MVA (10,411). September/November up trendline (10,450).
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.
3-24-04
Durable goods orders, February (8:30): 1.2% expected, -2.3% January.
New home sales, February (10:00): 1.1M expected, 1.106M January.
3-25-04
Initial jobless claims (8:30): 340K expected, 336K prior.
GDP final, Q4 (8:30): 4.1% expected, 4.1% preliminary.
Chain delflator, Q4 (8:30): 1.2% expected, 1.2% preliminary.
Help wanted index, February (10:00): 39 expected, 38 January.
Existing home sales, February (10:00): 6.2M expected, 6.04M January.
3-26-04
Personal income, February (8:30): 0.3% expected, 0.2% January.
Personal spending, February (8:30): 0.5% expected, 0.4% January.
Michigan sentiment revision, March (9:45): 94.0 expected, 94.1 preliminary.
End part 1 of 3
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world stock market
us stock market
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