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money investment, Breakout test
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4/01/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Thursday: None
Buy alerts issued: IVIL; ECOL
Trailing stop alerts: ONNN (took rest off table)
Stop alerts: DRAX; IPT
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SUMMARY:
- Market shakes off Wednesday churn and continues the rally.
- ISM puts bounce back in economic news ahead of jobs report.
- Volume mixed as stocks start to rally again, still working nicely on the base.
Stocks resume bounce, aided by some solid economic data.
Stocks started underwater, but that softer open gave buyers an opportunity when the national ISM easily topped lower expectations, expectations that had declined as the economy is continually bashed in this election year. Buyers seized on the news and the lower open and bought into the market. Stocks surged well the first two hours, then spent the rest of the session backing off but managing to avoid a selloff despite a serious late attempt. The Dow even managed a positive close with three of its components guaranteed to trade lower as they were getting the boot off of the index (IP, EK, T in favor of PFE, AIG, VZ).
This was good action on the heels of the Wednesday higher volume churn at resistance. Indeed, NASDAQ and SP500 closed well above the exponential 50 day MVA and threatened the simple 50 day during the session. Once again volume, after looking strong early, was unable to keep pace with the buying on NASDAQ, adding another session of lower volume trade to the bounce off NASDAQ 200 day MVA. NYSE volume did manage a bump, a nice addition to the bounce that has been lacking on the NYSE. Volume was solid as new money was put to work to start the new quarter, but it was mixed, indicating institutions were still not ready to place the heavy bets right before the jobs report where expectations are now all over the map. The market did a good job of fighting off a last hour selling attempt, but overall the price/volume action still speaks of a correction in progress (and making good progress) as opposed to the resumption of the uptrend.
THE ECONOMY
ISM reverses sour mood from Chicago.
62.5 for March easily topped the 59.5 expected and even the 61.4 from February, indicating no slowdown in national manufacturing. Indeed, the numbers say the expansion picked up pace with its fifth consecutive month above 50, the breakeven point. There was some weakness in the sub-indexes, but nowhere near what was seen in Chicago. New orders fell but only to 65.7 (66.4 February), still a very strong reading. Production rose (65.5 versus 63.9). Delivery times rose to 67.9 from 62.1, indicating some hiring is needed. The order backlog rose as well to 63.5 from 62. Even the employment index rose, moving to 57 from 56.3.
The question is whether Chicago and New York, both significantly below expectations, were isolated events or a signal of what is ahead nationally. The regional reports led the national survey higher by 2 months; are they indicating softening over the summer? It is harder to call it that way because once the momentum picks up nationally it tends to keep moving in trend as the production backlog, new orders, and delivery times show. They are all indicating further manufacturing expansion, and yes, hiring, still to come.
February PPI is released but the numbers are hard to believe.
The government has revised the PPI calculation to more closely reflect reality. It showed the price of heating oil declining in February along with other energy costs. While oil prices have received more print recently with calls to open the SPR and to show the Saudis 'tough love', oil prices were no wallflowers in February. Thus the overall reading of a 0.1% increase and a core reading of 0.1% left many scratching their heads and wondering what reality the PPI was revised to reflect. Sounds a lot like the 'bazaaro world' reality on Seinfeld where the characters were the same but opposite.
Expectations were for a 0.4% rise after a 0.6% January gain. Now this is February data, so it is dated. Even with that, however, it is still in sharp contrast to the March ISM that saw the prices paid component leap into the seventy range. Other goods prices did show an increase, however, such as intermediate goods such as lumber and yarn (knitting clubs must be booming) jumped as well as crude goods such as timber and cotton. These gains come on top of equally solid rises in January.
It now appears that education and healthcare price increases are being joined by items actually included in the pricing measures. Looks as if they will be showing up in the CPI soon.
Jobless claims rise but fall.
342K was higher than the 339K previously reported and the 340K expected, but down from the revision of the prior week to 345K. This bounces around week to week, so it is not that big of a deal as the trend remains slowing job losses. Continuing claims rose to 3.06M annualized from 3.03M annualized. That is another changed that is basically statistically insignificant given the deviation in the week to week numbers.
What is significant is that the jobless claims are not falling as rapidly as before. That is another indication there is no surge in hiring that is soaking up the unemployed in any numbers. Thus the expectations of 200K or more jobs are still very ambitious even with the hints here and there that the market is improving. Remember, the CEO of Manpower and its survey that many are citing as support for a significantly stronger number (and with 21K last month, that would not take much to top) stated that this was just the beginning of the cycle, and it had to build for several months before there is that steady, strong monthly jobs growth.
Another important factor to consider. The California grocery strike has ended, and roughly 75K of the jobs reported in the March number will be attributable to the event. So automatically investors are going to subtract 75K from any number reported and take the result as the truer number of jobs created. Thus to be of any significance the report would have to be well over 200K to make a dent in the unemployed, at least as far as non-farm payrolls because it takes about 100K new jobs per month to hold steady with the new entrants into the job market.
Thus, the President and the administration are going to get hammered again unless 275K or more jobs are created. Frankly, if that kind of number is reported, we won't believe it simply because the other data, though improving, is not at a level to substantiate such growth. It would be critical for April to match or substantially adds to that level of gains. We won't know that Friday, though if that type of number is reported, the first blush will be something akin to euphoria as far as the market is concerned. But, we are walking around in Wonderland with that type of number, and reality suggests that is not going to happen. Just think, even with a 100K level that is still akin to the 21K reported in February. It simply is not a great scenario for tomorrow morning.
THE MARKET
Despite volume failing to give a decisive thumbs-up to the Thursday action, the market continues to do some solid work on its base. It showed some strength by clearing the exponential 50 day MVA. That helps further work on the bottom by making a solid first run off of the bottom, setting up a more orderly test that we still think will be made. Stocks are showing the same as many are turning up off of the bottoms of their bases, a necessary step in the basing process as they start to build the accumulation into their patterns. When the market pulls back next, many of these will start to form handles where they shake out the last sellers that get frustrated by the action.
It is hard to fight that when you are in positions with stocks that have worked for you or are still solid but are on the bubble because you don't have big gains in them. It always pays to look at the pattern from the big picture of where it is in its life. Is it still holding support of just making minor violations? If it is still working on overall a good price pattern and the market is still building well for the next breakout and economic data looks to continue its improvement, we will try to let it work through the pattern and continue the move.
This turn off the bottom of bases by many beaten down stocks is coinciding with the transition in price/volume action on the indexes. That is a real positive for the market and is showing some building strength. We still are looking for a test of this move because, even though it is showing signs of improving, the big money is not all in there pitching. It is doing just what it should be doing at this point, however: showing improving price/volume action, making a rally up off the lows, setting up new bases in stocks, and also showing some leaders breaking out. Not a lot of the latter because the rally is already 7 sessions and 100 points old on NASDAQ, but still a number of stocks are making the breakouts. After another test and a bit more lateral movement, however, there will be many more stocks ready to breakout in waves.
Market Sentiment
VIX: 16.65; -0.09
VXN: 23.41; -0.35
VXO: 17.15; +0.42
Put/Call Ratio (CBOE): 0.61; -0.7
NASDAQ
Moved through the exponential 50 day MVA and came close to the simple 50 day, but volume shrank as it made the move. Still struggling to get a lot of institutional sponsorship.
Stats: +20.79 points (+1.04%) to close at 2015.01
Volume: 1.853B (-2.07%). Volume was running solidly but then faded late as investors got a big skittish ahead of the jobs report late in the session. NASDAQ is still showing some decent price/volume improvement, but it and volume have lagged on this move, begging for another test lower before the bottom is set.
Up Volume: 1.347B (+663M)
Down Volume: 458M (-690M)
A/D and Hi/Lo: Advancers led 1.73 to 1
Previous Session: Advancers led 1.21 to 1
New Highs: 180 (+28). New highs are starting to creep up as a few more stocks here and there keep breaking higher.
New Lows: 15 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Techs moves through the exponential 50 day MVA (1999) and nodded toward the simple 50 day (2023) on the high (2019). A very nice continuation of the now 115 point bounce off the 200 day MVA (1900), a bounce that has shown some further improvement in price/volume action but volume has still been too low to indicate real institutional buying, at least at levels that would cause this move right here to be the breakout move. We are expecting this move to top out at the simple 50 day or at the early March highs (2058 closing, 2069 intraday) and then ease back for a test of some sort of the prior low right at 1900. The issue is whether the jobs report allows the move to continue to hold up at this level or if it prompts the market to start that test post haste. The February jobs report prompted the 150 point drop that was the third down leg in the correction. If it starts again we want to see lower volume after the first selling session and we also want to see stocks more or less hold their patterns while leaders come back to test their breakouts on lower trade as well.
S&P 500/NYSE
NYSE volume moved above average for the first time in three weeks as the large caps and small caps posted gains, notching a much needed accumulation session for these indexes.
Stats: +5.96 points (+0.53%) to close at 1132.17
NYSE Volume: 1.535B (+3.91%). First above average volume in three weeks and it came on an upside session. That is good news and much needed for these indexes as SP500 shows its second accumulation session in 4. SP500 is finally starting to catch up with NASDAQ and its transitioning toward accumulation. Still not enough to make this the breakout move, but a very welcome change as the market starts to 'get right' for the next move higher.
Up Volume: 1.053B (+243M)
Down Volume: 472M (-152M)
A/D and Hi/Lo: Advancers led 1.96 to 1. Solid upside action as the small and mid-caps were running solidly just behind NASDAQ and SOX.
Previous Session: Advancers led 1.61 to 1
New Highs: 313 (+55). These are getting very respectable as the smaller caps move back up in the range of all-time highs once more.
New Lows: 8 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Moved further off of that important 1125 level on rising, above average volume. It pierced the simple 50 day MVA (1134) on the high (1135.67) but could not hold that level on the close. Still a good showing for the index as it demonstrates some strength even this late in the bounce off the March lows. Institutional support is still not wholehearted, and thus we still anticipate a test lower to set the base.
DJ30
Another doji at the exponential 50 day MVA (10,359) as DJ30 managed a slight gain on some improved, above average volume. It was not able to forge ahead mainly because the shakeup in the Dows' lineup. The Dow has actually put together a 4 week double bottom with handle base. It could theoretically breakout from here and rally, but if the rest of the market makes a test as it looks they are set up to do, the Dow will pullback as well.
Stats: +15.63 points (+0.15%) to close at 10373.33
Volume: 218 million versus 189 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Jobs, jobs, jobs. You have to be almost as sick of hearing about this number as you are with the back and forth bickering from all levels in the political campaign. This lagging indicator has been lagging, at least from a non-farms payroll measure, even more than usual, though not as bad as the media and pundits proclaim. Recall that the economy, based on the bottoming in the market and not some arbitrary 'the recession ended here' date, could not have been expected to create jobs until December. It started before that and has continued, but because this recovery is coming on the heels of a nasty boom to bust plunge, the job creation is different as it typically is during these types of episodes. Jobs are forming in small, newly formed businesses, and in the long run, that is much better for the economy than bloated, slow growth companies adding jobs. Indeed, those companies are going to continue to decline in their jobs as the new upstarts move turn into the new growth engines for the next 10 years or more.
That is great news, but we live in the here and now, and if jobs don't start surging over the next couple of months all of those incentives that have started this dramatic economic recovery and expansion will be allowed to expire or outright removed, and that will start the cycle of knocking the legs out from under prosperity. It always happens that way because there is an unfounded fear of deficits. Our deficits are not big by historical standards, but based on dollars not adjusted for inflation they look big. A very insightful article in the Wall Street Journal last week noted the false security paying down federal debt provides; for expansion there has to be debt either in the form of federal, individual, business or most likely all three. If you reduce one too far, the others have to make up the difference and that can cause problems. That is what the reduction in debt in the late 1990's did; it shifted much of that to households in order to keep the economy moving. If the households take on too much of the debt to balance the equation, and then say taxes are hiked to fund more federal spending, then you have the potential for a breakdown that causes a nasty recession all over if not worse.
In any event, the rise of the small businesses is very good for the country longer term, but there need to be company jobs as well as everyone is not an entrepreneur. Those jobs will start showing up in late summer when the IRS and federal government get together on the tax data and see a surge in small business creation. Until then it is up to the large companies to report job growth, and as we have seen they are not jumping to hire.
We think the jobs report has the real potential to disappoint given California grocery strike factor. We think there will be definite improvement, but not of the level that will excite the masses and silence the critics who have fixated on jobs as the sign of economic woe (as the other complaints about the economy have been put to bed one by one as the economy continues to expand). This complaint will be silenced as well, but the question is when. Again, we don't think it will be tomorrow.
A disappointment of scale similar to February opens up the selling potential. An in line number allows stocks to hold their ground, maybe move up a bit more; that number, however, will have that grocery strike element to it. A truly big number will have stocks jumping at first. Even that move won't hold and provide a new breakout in our opinion. The market is not at the point where it has built the foundation for another breakout and sustained move. A second test is what it needs, and this move higher has not shown the strength to dispense with one.
Friday we will just have to see where the report shakes out and where the market heads. We anticipate that the number won't be quite satisfying, and thus we could see those put plays come into contention. Either way we have plays that are ready. Many have moved higher the past few sessions, but it is the rare play that is moving on strong volume; most are just drifting higher ahead of the jobs report either in blissful ignorance or just continued relief from the prior selling. Again, however, we note that now even SP500 is starting to show improving price/volume action, a very positive development for the longer term health of this base.
Support and Resistance
NASDAQ: Closed at 2015.01
Resistance: The simple 50 day MVA (2024). 2057, then 2089.
Support: The exponential 50 day MVA (1999). 2000, the top of the late 2003 base. The 10 and 18 day MVA (1978). Some prices from the recent March consolidation attempt (1943). Mixed tops and bottoms at 1900. The 200 day MVA (1899).
S&P 500: Closed at 1132.17
Resistance: The simple 50 day MVA (1134). 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: 1125, still a key level. The exponential 50 day MVA (1122). The 10 day MVA (1119). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. 1075 to 1070 from the December consolidation.
Dow: Closed at 10,373.33
Resistance: The simple 50 day MVA (10,464). September/November up trendline (10,555).
Support: The exponential 50 day MVA (10,359). The 18 day MVA (10,301). Then the 10 day MVA (10,288). 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.
3-30-04
Consumer Confidence, March (10:00): 88.3 actual, 86.0 expected, 88.5 February (revised from 87.3).
3-31-04
Factory Orders, February (10:00): 0.3% actual, 1.5% expected, -0.9% January (revised from -0.5%).
Chicago PMI, March (10:00): 57.6 actual, 61.0 expected, 63.6 February.
4-01-04
Initial jobless claims (8:30): 342K actual, 340K expected, 345K prior (revised from 339K).
Construction spending, February (10:00): -0.1% actual, 0.0% expected, -0.8% January (revised from -0.3%).
ISM (manufacturing sentiment), March (10:00): 62.5 actual, 59.5 expected, 61.4 February.
4-02-04
Non-farm payrolls, March (8:30): 123K expected, 21K February.
Unemployment rate, March (8:30): 5.6% expected, 5.6% February.
Average hourly earnings, March (8:30): 0.2% expected, 0.2% February.
Average workweek, March (8:30): 33.9 expected, 33.8 February.
End part 1 of 3
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money investment
Breakout test
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