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day trading, Breakout test
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4/12/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: NSTK
Trailing stops issued: SGMS
Stop alerts issued: EEFT; GILTF; TTP
SUMMARY:
- More good economic news but this week the market sells.
- Retail sales roar, revisions offer further proof of economic strength.
- Broad selloff as stocks distribute and undercut recent lows. SOX again will be the key.
Strong economic data rattles investors.
The market is full of paradoxes and Tuesday it showed another: sometimes good news is bad news. Retail sales jumped in March, and along with the inventory data reported Tuesday and last week, GDP is going to be revised up to near 5%. If the jobs data continues to build, and with this strong economic data there is now little doubt it will, then the Fed is going to act. The Fed has said as much the past year when it talked of the need for solid jobs growth before it started to tighten its accommodative stance. Thus there could be a first hike in August as long as the jobs reports continue to hit the 200K range for 2 or 3 more months. Not a spotty up and down patchwork, but a steady trend higher. That is all the Fed needs to start hiking rates and actually follow the 10 year treasury higher.
On the news the dollar soared, gold plunged, and the 10 year note sank lower. The 10 year is doing a lot of the Fed's work for it: the market fears the Fed so much it is pricing in its moves well in advance. Why the fear? Because the Fed virtually never gets it right. It is the worst lagging indicator there is once it starts a rate campaign. It simply does not know when to quit one policy and switch to another. That is the danger. It holds rates too low for too long and threatens to birth inflation. Then it gets scared of its shadow and tightens too much and chokes off the recovery. The market knows this; all it has to do is look at history. That is why it is getting really fidgety here.
Larry Kudlow put together a commodities versus 10 year treasury chart and showed the widest spread between the two in decades. Commodities are way up while the treasury is artificially low. The market is doing some of the Fed's work, but it cannot do it all as long as the Fed holds short term rates artificially lower. Again, the Fed is preparing us for a rate hike, but it does not want to rattle the market. It wants to stick to its plan of seeing strong jobs growth to hike rates. It thinks it is going to get it over the summer given the language we are getting from all current and former FOMC members. The word has been spread to get the word out. The Fed is trying to telegraph it, the message is being heard, and the market is reacting to the Fed overreacting with too many hikes.
Not that overreacting is a real possibility just yet. The Fed will probably raise rates 50 basis points over two meetings and then wait until after the election. It does not want to appear too aggressive ahead of a national election. Based on the Kudlow chart, it still has plenty of room to raise rates easily to 3.5% to 4%. Retiring San Francisco FOMC member Parry noted that the Fed could raise rates to 3% given a 1% to 2% inflation rate. Hello market, that is about as clear as it gets.
In the end it was that concern, the Intel earnings, President Bush's pending news conference, and worries about Iraq that sent the market down and would not let it back up. There was distribution and selling in some leadership; those are always red flags. Stocks will have to hold near the current levels and see volume ease in order to keep the pullback in line.
THE ECONOMY
March retail sales, February inventories solid, GDP will be revised higher.
1.8% versus 0.7% expected, the best showing since March 2003. February was revised to 1.0% from 0.7%. Take out autos and you get a 1.7% gain; there was no one sector you could 'blame' for the strength. Even the ex-autos from February was sharply higher at 0.6% from 0.0%.
Business inventories took up where the wholesale inventories last week left off, posting a 0.7% gain, better than the 0.5% expected and 0.2% in January. This along with the wholesale inventories jump and the strong retail sales indicates a 5% GDP growth level in Q1 versus the 4% originally reported. That is close to 6% growth per quarter for the last three quarters. That is impressive. Moreover, it shows the economy is not waning, but again picking up speed after a slower Q4. That is great news but it is exactly what the market feared: too hot and thus requiring the Fed to raise rates sooner and faster. As noted, that is always a legitimate concern when dealing with the Fed.
Consumer cycle peaking?
Some are stating that the consumer cycle is over and that the consumer will play less of a role the rest of the year. The ideas is that consumers are early cycle in an economic recovery, and after that first binge they are through. Dubious. As discussed Monday, the consumer never really quit consuming in the recession. You know this because it was beaten into your head every time you picked up a newspaper: "The Fed notes the consumer continued to consume during the recession. Thus the Fed does not expect a consumption surge that will accompany this recovery as it has in recoveries past. As you know, the consumer makes up two-thirds of the economy . . ." The consumer has shown its propensity to consume in good times and bad. The consumer consumes in today's society. The recovery is now being driven by the synergy between the rebirth in business investment and spending and the consumer continuing to spend.
What we have seen for the past three years at least is a steady consumer that would rotate between durables (cars, washers, etc.) one month and non-durables the next. Recently consumption has increased as the economy surged even though it was not supposed to do that according to the experts because the consumer was tapped out and too leveraged. Indeed, they are saying that again right now: too leveraged to keep spending. In a rising economy with rising wages and household wealth at all-time highs, the consumer is not tapped out.
Moreover, as noted Monday and last week, when the business side of the economy recovers and starts to produce, the consumer demand meets that production. Now there are certain indicia in the consumer cycle as to when it is starting, peaking, etc. One of those is luxury or high end buying. The biggest sales increases the past months, particularly last month, were in the high end retailers, e.g., NMGA (+24%). Ask any retail analyst and he or she will tell you that luxury goods buying precedes mainstream surges. It also is the last to go down when the cycle is ending. The question is, are you at the front or the end of the cycle? Again, many argue it has peaked. Our point: whether near the beginning or end as it is being described, the consumer is going to continue to consume at solid levels. Indeed, the recovery in the supply side of the economy helps feed that consumption as opposed to the conventional wisdom that the supply side reacts to consumer demand alone.
THE MARKET
The market took in the retail sales figures, the reaction in treasuries, the reaction of the dollar and gold, and decided it was best to sell into the early pop higher that was telegraphed by the pre-market futures. Futures had rallied on the retail news, indicating the market liked what it heard. When the full market was involved, however, we saw the second sign of trouble in this pullback: gains were sold into and volume rose as the selling continued throughout the session.
As noted, that was the second sign. Retail stocks, leaders in the rally, sold on high volume Thursday. They were at it again Tuesday with some key stocks selling once more on rising volume. We often talk of leadership being the key to any move upside or downside, and when a market leading group starts to falter it is going to directly impede the market's overall action unless there is another sector that rises to take its place.
There was no sector rising to take the place of retailers. Oil stocks were up modestly, but frankly, if the market is going to have to rely on the oil stocks to lead further, the market is truly on its last legs in this run. Historically when energy stocks lead there is a problem in the economy, specifically energy prices that are too high for the economy to continue. If this is the only group that emerges as a clear leader the next few weeks, that is a serious problem for the market as the cost of doing business for the rest of the economy is rising based on energy costs.
Indeed, breadth Tuesday was just about as bad as we have seen it since the bottom back in July to October 2002. NYSE breadth was -7:1 as small caps led the selling, falling 2.2% and undercutting the 18 day MVA. It was not alone as SOX and NASDAQ sold 1.7%, but it was indicative of the aggressive rollover Tuesday as a leading group turned back hard after staking out a new all-time high last week. Sharply negative breadth can be an indication that selling is getting overdone as seen in the fall of 2002. At this juncture the market is in a test of the rally off the March lows. The very high negative breadth is a possible indication that the test is ending, but this is not the usual case for a pullback to test or form a handle; you want to see the action get very quiet as it was doing up to Tuesday.
Volume was up as stocks were dumped into the early rise. A distribution session when an index is trying to put together a pullback can often lead to the end of the pullback as far as setting up a new breakout. As noted Monday, you want to see the action get real quiet as sellers diminish in number. We also noted you can get to the breakout point but still have to see the breakout. Tuesday's action put a lot of pressure on the market's effort to make the breakout.
SOX may be the last gasp for this rally. While the other indexes sold below the March lows, SOX held in the range and held the 10 day MVA on its low. It is still in good shape as semiconductor stocks had a decent session despite falling 1.7%. The key for them will be how INTC is treated Wednesday. After hours INTC was trading all around flat but it faded late in the session. It was not a great report by any stretch and investors did not know what to make of it. It is clear, however, it was not sending stocks racing higher after hours.
It is still possible that the market is shaking out the last sellers, but there were definitely more sellers to shake out Tuesday. The higher volume selling diminishes the pullback's ability to complete the base and provide a breakout, but as noted, SOX is still holding in its range and the other indexes are also still above the 50 day MVA, a level we earlier indicated would not be a bad point for the consolidation to find bottom. It would have been a much better sign if buyers had rushed back in late in the session and bid prices back up, using the selling as a chance to pick up stocks before they ran higher. The anemic upside blip attempted in the last hour looked more like a hiccup.
As for leadership, retailers were under pressure as noted, as those as well as other stocks impacted by interest rates sold off (credit facilities, lenders, etc.). While there were some breakdowns, many, many stocks held near support. Many are holding their 50 day MVA. We noted that the 18 day MVA crossover would be tested, and it that test is underway. The volume makes it problematical if it holds, but it will get the chance to do so just as it typically does. We want to see how that pans out given the indexes are still over key support levels.
Market Sentiment
VIX: 17.26; +1.98
VXN: 22.23; +1.86
VXO: 17.5; +2.06
Put/Call Ratio (CBOE): 0.92; +0.15. Jumped up closer to that critical level over 1.0 that can signal the selling is getting enough to reverse the selling. As noted above, this is at odds with a nice, easy pullback to test a rally higher. Thus we are disappointed with the action and have to be dubious of the ability to finish the pullback and provide the breakout. At the same time we note again that indexes are still over support and many leaders are just making modest pullbacks to near support.
NASDAQ
Undercut the recent lows in the pullback which would not be bad action as a final shakeout but for the heavy volume.
Stats: -35.4 points (-1.71%) to close at 2030.08
Volume: 1.965B (+29.86%). From the lowest volume of the year to back above average as stocks sold and closed near the low. Clear distribution that shows tech stocks getting dumped in quantity. One day does not spell the end of a rally attempt, but the timing, i.e., within the pullback, is not indicative of shares being held in anticipation of a breakout.
Up Volume: 544M (-513M)
Down Volume: 1.407B (+980M)
A/D and Hi/Lo: Decliners led 3.64 to 1. Very sharp downside as all stocks were sold, not just financial.
Previous Session: Advancers led 1.35 to 1
New Highs: 141 (-40)
New Lows: 24 (+10)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Undercut the recent March lows in this pullback (2037) and the 10 day MVA (2034), working on filling the gap higher 7 sessions back on the strong jobs news (2019 is where the index gapped from). It has just about filled the gap and is moving toward the 50 day MVA (2013). We noted previously that a test of the gap point, the 50 day MVA or even 2000 was not necessarily a bad thing. Of course, we also stated the pullback should be orderly and not accompanied by big surges in volume that show stocks being tossed aside. Again, one session does not mean the pullback is a failure; it could be a serious shakeout, and we want to see how the indexes hold at key support at the 50 day MVA as we noted Monday, and also how SOX fares as its pullback has kept it easily within its recent range.
S&P 500/NYSE
Dumped on rising though still below average volume to tap the 50 day MVA on the low. This is where it needs to find some strength.
Stats: +0.11 points (0%) to close at 1129.44
NYSE Volume: 1.419B (+29.29%). Volume rallied as the large caps tapped the 50 day MVA. Still below average but a significant jump in selling volume. It needs to hold here and show a resumption of positive action, specifically a rising volume rebound.
Up Volume: 153M (-457M)
Down Volume: 1.262B (+780M)
A/D and Hi/Lo: Decliners led 7.05 to 1. This was truly ugly downside breadth as the small caps crumbled. As noted above, this type of breadth can signal changes in direction, particularly moves off of selling. Its appearance during a pullback to test a rally is dubious.
Previous Session: Advancers led 1.03 to 1
New Highs: 114 (-46)
New Lows: 113 (+62)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Cut through the bottom of the pullback range (1134) as well as the simple 50 day MVA and 18 day MVA (1131). It tapped the exponential 50 day MVA (1127) on the low and 'bounced' to close 2 points higher. The very quiet action exploded, but to the downside, not the upside breakout we were looking for. Kind of a breakout in reverse. It is still holding the 50 day MVA, the point we originally said we wanted to see it hold. Definitely will get the chance for the 18 day MVA to test the 50 day MVA crossover. This is the key level of SP500 to hold (on down to 1125) in its short (too short) base. Much will depend upon what NASDAQ and SOX do as well with their support.
DJ30
Volume jumped as the blue chips sold except for Intel, though Intel was down a bit in the late after hours. The index closed just below the exponential 50 day MVA (10,390) on spiking though still below average volume. Of the three major indexes, the blue chips have turned from decent to ugliest as they have no room to maneuver. The only redemption is that it will most likely follow the other indexes as they try to hold their key support. High praise indeed.
Stats: -134.28 points (-1.28%) to close at 10381.28
Volume: 142 million shares versus 188 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The question you have to ask is why would the market explode higher 7 sessions ago on strong jobs data and then provide almost an equally strong downside move on a solid retail sales report? Has the world changed that much in seven sessions to warrant such a reversal? Could we have wrought such a difference in the same time it took the creator to make the world? Seriously, what was the difference in the numbers? Was it the numbers? Was it the Iraq tension added on top of the interest rate risk?
It is always difficult and risky to pin specific reasons on buying or selling other than the obvious such as 9-11. Saying fear of rate hikes caused the Tuesday selling when good news was reported after stocks surged on arguably even better news for the economy seems incongruous. This is expiration week and that will also have the effect of high volume swings ahead of Friday. Again, trying to pin a reason on a day's action, particularly when there is incongruence in reaction to the same type of news.
That is why the Tuesday action places a premium on how NASDAQ, SOX and SP500 react to their near support, specifically the 50 day MVA on NASDAQ and SP500. SOX is key as well as it is holding its pattern nicely. Its key level is the 50 day MVA (497). We expect stocks to test these lows and even undercut them. That will truly test the move; stocks will either recover and retake those levels on volume, or they will rebound but fail to recover these key levels. That will tell the tale. Again, the distribution was not what you want to see in a test, but one day does not necessarily destroy the consolidation. It reduces expectations regarding a successful breakout, but how the indexes trade at the key support in this expiration week will show us if any strength is left for a breakout.
Support and Resistance
NASDAQ: Closed at 2030.08
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 simple 50 day MVA (2017) along with the 18 day MVA (2019). The exponential 50 day MVA (2013). 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 (1914).
S&P 500: Closed at 1129.44
Resistance: The simple 50 day MVA (1134) and the 10 day MVA (1136) have merged. 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 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 10,381.28
Resistance: The simple 50 day MVA (10,453). Price consolidation at 10,600 level. September/November up trendline (10,615). 10,747 is the February high.
Support: The exponential 50 day MVA (10,390). 10,000 to 9900-9850. 9859-9855 is the next real support.
End part 1 of 3
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day trading
Breakout test
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