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4/12/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: VRNT
Buy alerts issued: CERN; PHMD; NMSS; TMWD
Trailing stops issued: ARRY
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- A quiet start to a big earnings and economic week.
- Retail sales set to start the economic week.
- Another low volume lateral move as market indexes continue the shakeout.
- Subscriber Questions: Please send any questions you have. We love answering them.
Stocks post gains, but no commitment.
Monday Investors had about as much commitment to stocks as a college bound youth has for his or her last summer love. A hug, a peck on the cheek, a "I promise to call you" half-truth, and then out the door. Very light volume and very modest breadth belied some decent gains. SOX was a relative laggard all session ahead of the start of chip earnings, but it managed to warm to the close. Instead of helping stocks overall, however, the rest of the market gave back when SOX advanced. The end was a very modest upside move that did not break stocks out of their range, but more importantly to us, kept them moving very nicely in the weeklong lateral consolidation of the bounce off the March lows.
This could be quite frustrating to many investors, but it is the action the market needs ahead of a heavy earnings and economic data week to shake out the last sellers and give the market the window to make the breakout if it will take it. In that sense we really liked what we saw today, and there were a few god moves from solid stocks to help confirm the action was still positive. The market still has to make the breakout, but it continues to shape up to do just that.
THE ECONOMY
Retail sales are out Tuesday before the open, and as usual the retail numbers will be turned over and over in attempts to ascertain if the consumer is slowing, holding the line, or perhaps picking up the pace. Generally the consensus is that luxury or high end retailers are performing best, but the middle and lower end retailers are not drying up and blowing away either. Last week NMGA reported tremendous gains while DG, NDN and other very low end retailers slumped. The extremes are always the exception; overall retail remains solid.
The focus on retail sales is, despite conventional wisdom, looking through the wrong end of the glass. During the recession everyone sweated the consumer losing pace, having 'overspent' during the down economy. Indeed Greenspan and most any economist or analysts you talked with said that the recovery would not be very good given the consumer had continued to spend during the recession. There was just not going to be that rush to spend based on pent up demand that usually powers recoveries.
There was indeed some pent up spending as we noted at the time, namely the desire to get out and see the country again after two years of staying home and 'nesting.' Airlines, vacation destinations, motor homes, hotel occupancy and other vacation related sectors surged back to life.
But that was hardly enough to explain the best economic gains in 20 years posted by report after report. As we have discussed before and over the weekend, economic activity is not just demand driven as you erroneously hear day after day from economists, financial commentators, and politicians. If it was we would not have had a recession; consumer demand did not drop, and if it was the driver, then businesses would have kept on spending to meet that demand. No, the recent events dramatically highlight that the supply side of the economy is truly the key to economic growth. Supply helps foster demand by producing lower cost goods and services as better technologies arise. If you want to stimulate the economy, stimulate the supply side in ways that will promote it to produce efficiently. As we have seen, you can get staggering growth levels when you do that. The strongest growth rates in 20 years since the Regan tax stimulus took effect tells the story.
The war is now the real issue.
Politicians can find reason to gloat or nitpick anything. That is their job. Mr. Kerry can talk about the economy all he wants, but if it continues to produce 500K jobs per quarter (and probably more than that), then his arguments are quite hollow. You can tinker with the 'misery index' all you want just as the Fed tinkered with what the signals for inflation were back in the late 1990's; we saw how useful and in the end how damaging that was. If jobs keep coming and the economy keeps growing as it has (and recall we said Q1 GDP will be revised closer to 5% than 4%), the economy is off the table.
That means to many that Bush is the winner because people vote their pocket books. As we wrote 5 months ago, however, the one trump of a recovering or strong economy is an unpopular, stagnant war. Two times in history a strong economy has betrayed a sitting president because of an unpopular war. With Bush now having to answer for Rumsfeld's and his generals' failure to secure Iraq in a manner that would allow the rebuilding and transition, Bush is in a very precarious position. That is where Kerry should attack, particularly if the economic data this week and the jobs report in early May continue their strength. Even in politics you lose credibility if you argue the sky is not blue but a special shade of gray.
It is somewhat ironic that the second Bush will have a strong economy but then get the run of his political life over his supposed strength in areas of defense. His father was popular for his foreign affairs skills but got beat on his supposed lack of concern for the domestic issues including the economy. The economy was in the process of roaring back, but it was too late for him to claim any benefit. The President could have a roaring economy and actually have Iraq under control by the election but not get the benefit of the latter to go along with the former.
THE MARKET
The market posted gains but they were light, particularly when viewed with the extremely light volume. NASDAQ, SOX, SP500, and indeed most of the indexes continue their week long lateral moves after rallying off of the March lows. The move has been on low volume as the indexes mostly hold onto their gains. That is very frustrating for many investors both professional and individual. You hear it on the financial stations when money managers talk of the market peaking out here with no further momentum. They saw the bounce off the lows and they see the indexes stalling out even as earnings season gets underway. They conclude that the market has decided that earnings won't be enough to push it higher.
This is pretty familiar action, however, repeated over and over in the market history: it sells off after a run, it searches for bottom in a series of legs lower, it starts to work on a bottom, and rallies off the low as buyers come back in. Then it gets its real test as it moves back up toward the prior highs. Those that bought in late sell when they see the market appearing to stall out. They try to hold on, but it keeps faltering and sputtering along. They get frustrated and don't want to get caught in another decline. They start thinking it is about time to sell out and avoid such a fall. A few more intraday lows that take out the Wednesday or Thursday lows would act to 'shake out' those sellers that are on the fence and ready to bail.
Thus we view the action as constructive, not destructive. The market will still have to deliver a breakout where volume surges back above average, breadth is strong, and leaders are running. This lateral move is allowing stocks to form up their pattern right now, either forming handles similar to NASDAQ or testing prior breakouts. Indeed, several stocks were moving higher again Monday, breaking out of solid bases on volume even as the overall market fiddled about once more. As noted over the weekend, accumulation on NASDAQ is positive, meaning that more big money is moving into stocks than out of stocks during this base. As long as that holds, the chances of an upside breakout solidly outweigh a breakdown. The negative sentiment expressed by more than a few is sauce for the goose.
Market Sentiment
VIX: 15.28; -0.98
VXN: 20.37; -1.01
VXO: 15.44; -0.39
Put/Call Ratio (CBOE): 0.77; +0.03. The ratio rose on an overall up session in the market. It is an indication that big money continues to hedge the downside while speculators bet on a downside move. That is a signal that the concern about this lateral move is rising, and that is something you want to see.
NASDAQ
Posted gains that were modest based on the lack of volume supporting them. Truly low trade levels as techs continue to move laterally as earnings reports gear up.
Stats: +12.6 points (+0.61%) to close at 2065.48
Volume: 1.513B (-11.35%). The lowest volume of the month and rivaling that in late March. With the index moving laterally and holding its gains after the bounce and rally off the March lows down at the 200 day MVA, this is good action as it shows little selling even as frustration rises among investors.
Up Volume: 1.057B (+180M)
Down Volume: 427M (-382M)
A/D and Hi/Lo: Advancers led 1.35 to 1. Was 2:1 early but faded as the advance lost its strength after the first hour.
Previous Session: Decliners led 1.16 to 1
New Highs: 181 (-9)
New Lows: 14 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The 18 day MVA (2018) continues to move higher above the exponential 50 day MVA (2012) and is trying to cross the simple 50 day MVA (2018) as well. As noted over the weekend, this crossover is a positive indication as it often accompanies a more definitive move in the direction of the crossover whether that be up or down. It would do for it to rise for a couple more sessions and then test the crossover and hold. That would set the stage for the upside breakout as the index would have held on the lower test that acts as a shakeout of the last sellers. The pullback could have been back to the 50 day MVA itself, but it looks as if NASDAQ is exhibiting even more strength as it refuses to give back its gains.
S&P 500/NYSE
A low volume gain over the 10 day MVA as it continues to form its shakeout as does the rest of the market.
Stats: +5.88 points (+0.52%) to close at 1145.2
NYSE Volume: 1.098B (-7.61%). The lowest volume of the year as SP500 holds its gains off the March low, consolidating that move but refusing to give back the bounce. That is not bad action at all; you love to see very quiet, low volume action as a stock or index tests a move higher. Sort of the calm before the storm.
Up Volume: 610M (+152M)
Down Volume: 482M (-206M)
A/D and Hi/Lo: Advancers led 1.03 to 1
Previous Session: Decliners led 1.69 to 1
New Highs: 160 (+6)
New Lows: 51 (+20)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Thursday the large caps tapped the 10 day MVA (1136) on the low and recouped some losses as volume shrank. Monday it bounced back on even lower trade. Certainly not accumulation, but in this type of shakeout/lateral move what you want to see is lower volume. It is getting whisper quiet on the NYSE. Yes we would have preferred to see SP500 test back further on the original downtrend and then take more time to form the rest of the base, but the market typically does not give us perfection in its patterns. With NASDAQ showing a pretty darn solid pattern, SP500 looks ready to follow on a breakout move. Moreover, as with NASDAQ, the 18 day MVA (1131) continues its crossover of the exponential 50 day MVA (1127). That is a positive development though not a lock on future gains.
DJ30
Tapped the exponential 50 day MVA (10,390) Thursday and rebounded to cut its losses. Continued on up Monday with the rest of the market, but volume was just woeful. Again, we are not worried by the trade levels. DJ30 is mimicking SP500, i.e. moving laterally and slightly lower on very low trade as it too shakes out the remaining sellers in its test of the March double bottom.
Stats: +73.53 points (+0.7%) to close at 10515.56
Volume: 142 million shares versus 188 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Retail sales out before the open along with business inventories. We would really like to see another upside surprise in inventories (it has already been revised to +0.5% from +0.3% over the weekend) as that would confirm the wholesale inventories last week and assure an upward GDP revision. Strong retail sales would help that revision along as well. There are also earnings, scads of them. NVLS announced after hours and was enjoying a nice though hardly blowout post session. Tractor Supply continues its earnings rush and announced great results after hours while NVTL (wireless telecom) upped its guidance. Even Sherwin-Williams the pain company announced great results after hours and was jumping; it is in a perfect pullback to test its breakout and will jump nicely Tuesday as a result. What is the theme here: overall earnings are surprising to the upside. Not all, however, and when they don't it can be ugly. Most continue to beat and guide higher, and indeed First Call is already upping its second and third quarter estimates.
We continue to wait patiently and let the market show us if it is going to turn this lateral test of the bounce off of NASDAQ and SOX 200 day MVA into a full breakout that starts the next run higher. That is what this is setting up. This is not just another rebound attempt we are looking at. This move will break the market higher, or it will fail and send it back to work through the base further. We sure wanted it to take more time, maybe another 3 or 4 weeks to really set it up, but long ago we learned that shockingly the market does not listen to our beliefs. That is why it is somewhat amusing to hear analysts talk of how they feel a stock should be higher and just cannot figure out why the market is not buying it. Better to let the market show us it IS buying the stock and then move in. Nothing wrong with a little piling on as long as it is not too late in the game.
Stocks continue to move higher as others continue to set up in anticipation of such a move. Some are making solid volume breakouts, but with the low overall market volume we are still seeing many drift higher on low trade. It sure is tempting to chase some of these, but we try to fight the urge as best we can because low volume advances often fail unless they are bailed out by a big market breakout. That could come and indeed send them even higher, but we still prefer to move in on those that are actually showing the volume that indicates a lot of buying ongoing.
Earnings always adds spice to the action both upside and downside, but we will continue to stick with stocks in good patterns and showing solid accumulation as those are being bought up. When they make their moves we will move in with them, all the while watching for NASDAQ, SOX and friends to breakout on volume. This is expiration week for April, and we could start to see some positioning the next few days as investors position for that event. That can often drive volume higher though it has been tame the last expiration.
Support and Resistance
NASDAQ: Closed at 2065.48
Resistance: Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high. 2154 is the January high.
Support: The 10 day MVA (2018) continues to slide higher. The simple 50 day MVA (2017) along with the 18 day MVA (2018) that continues to rise over the exponential 50 day. The exponential 50 day MVA (2012). Then a jumble of support merges near 2000. 2000, the top of the late 2003 base. Some prices from the recent March consolidation attempt (1943). Mixed tops and bottoms at 1900. The 200 day MVA (1909).
S&P 500: Closed at 1145.20
Resistance: 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: The simple 50 day MVA (1134) and the 10 day MVA (1136) have merged. The exponential 50 day MVA (1127), just over 1125, still a key level. . 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 10,515.56
Resistance: Price consolidation at 10,600 level. September/November up trendline (10,610). 10,747 is the February high.
Support: The simple 50 day MVA (10,455) is holding along with the 10 day MVA (10,438). The 18 day MVA (10,399), continuing its crossover of the expo 50 day. The exponential 50 day MVA (10,390). 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.
4-13-04
Business inventories, February (8:30): 0.5% expected, 0.1% January.
Retail sales, March (8:30): 0.7% expected, 0.7% February.
Retail sales ex-auto: 0.6% expected, 0.0% February.
4-14-04
Trade balance, February (8:30): -$42.5B expected, -$43.1B January
CPI, March (8:30): 0.3% expected, 0.3% February.
Core CPI: 0.2% expected, 0.2% February.
4-15-04
Initial jobless claims (8:30): 335K expected, 328K prior.
NY Empire State PMI, April (8:30): 29.0 expected, 25.3 March.
Philly Fed PMI, April (12:00): 26.0 expected, 24.2 March.
4-16-04
Housing starts, March (8:30): 1.9M expected, 1.855M February.
Permits, March (8:30): 1.910M expected, 1.909M February.
Industrial production, March (9:15): 0.3% expected, 0.7% February.
Capacity Utilization, March (9:15): 76.8% expected, 76.6% February
Michigan preliminary sentiment, April (9:45): 97.0 expected, 95.8 March.
End part 1 of 3
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