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us stock market, stock prices
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4/17/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: KMRT; WMS; VION
Trailing stops issued: TOM; MAMA
Stop alerts issued: ABTL; CPTV
SUMMARY:
- Economic data softens a bit, stocks, at least some, rebound a bit.
- Economic data slows its pace a bit but the trend is still solid.
- Market still building its base, setting up for the next leg higher.
Stocks finish a tough week with a rebound, but can only finish mixed.
More reports of economic strength brought on a sudden case of Fed rate hike-itis that solid but uninspiring earnings reports could not overcome. It was expiration week so that added some spice to the action, but that took a back seat to the two 'E's', economics and earnings.
Depending upon which index you look at you would draw different conclusions about the action. DJ30, SP500, and SP600 (small caps) all undercut their 50 day MVA, but they always managed to retake that important level by the close. Indeed, when you match up the volume to the price action those indexes actually look pretty good for the wear: tested with intraday selling below key support, but reversing off the lows and ending up on top of that support on strong volume. The important small cap index, one of the triumvirate of the 2003 rally, even with a rough Tuesday and Wednesday, never really threatened a serious breach of 50 day.
That cannot be said of the remaining two of the trio. NASDAQ and SOX both undercut their 50 day MVA. SOX plunged down to its 200 day MVA on the Friday intraday low before managing to cut some losses. NASDAQ came nowhere near its 200 day, but it broke the 50 day, it could not hold 2000, and it barely managed to hang onto the November and December tops from the last 2003 consolidation. It was under heavy distribution two sessions as the semiconductors led lower. NASDAQ took some serious damage, and depending upon what SOX does from here it can turn and rally back up after this correction or slip right down into a double bottom just as it did in early 2003. Either way we think it will complete the consolidation and make the next breakout.
THE ECONOMY
Housing starts make one last surge.
March was a banner month for housing. Housing starts jumped 6.4% to 2.01M annualized units, crushing estimates of 1.9M. Permits were up as well, rising 1.9% and similarly beating expectations. As is often the case, the biggest surge comes when it is perceived a change is coming. With the strengthening economy, interest rates were rising in march even before the surge with the early April release of the March jobs data. That is pushing a lot of people to buy homes. Accordingly it is also pushing builders to get the homes they are planning actually on the ground to take as much advantage as possible of the surge in buying interest ahead of interest rates.
Everyone seems to realize this, particularly investors when you look at the charts of the homebuilders. They are off their highs and below the 50 day MVA, looking as if they are starting new bases. We expect to see home sales make a last surge here as rates are still historically low. Refinancing, however, has seen its boom days already.
Industrial production and capacity slide in March.
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.
Expectations were for a 0.3% gain in factories, but they surprised with a 0.2% drop. February was revised higher to 0.8% from 0.7%, so it was not a washout for production. Moreover, it was not a manufacturing miss; manufacturing held steady, while mining fell 0.3% and utility output thudded 2.3% due to early warm weather. Thus it was not nearly as bad as the headline made it seem.
Capacity fell to 76.5 from 76.7 (revised higher from 76.6), also below estimates at 76.8. with increased efficiency (a.k.a., productivity), capacity is not tremendously significant. It has been on a slow steady increase, and we want to see that continue, but it is not going to leap higher as did jobs.
Preliminary April Michigan sentiment sags but consumers continue to spend even with tax refunds less than anticipated.
We almost decided not to report this preliminary reading. It is such a small sample it is often inaccurate. Indeed, over the past 5 months the preliminary report showed weak sentiment, at odds with all other polls, only to be revised higher when the full sample came in. The conference board earlier reported solid , slightly better than expected consumer sentiment, and now the Michigan preliminary report gives a weaker reading at 93.2 versus 97 expected and 95.8 from the March final. War news and higher gasoline prices were credited for the fall.
Consumers, however, as just seen in the retail sales and in the strong chain store sales, are, as usual, showing their confidence with their wallets. That is nothing new. The worry many economists have is that the tax refunds that were anticipated to run close to $100 billion due to the tax cuts are not coming in that strong, even less than $50B. Some are saying the tax cuts did not work; that they are not producing the windfall for taxpayers that was anticipated. That is partly true, partly false.
One of the big reasons the refunds are less is that the economy really did improve and a lot of people started their own companies whether consulting, service, manufacturing, or otherwise, and they made money at it. They actually moved up in tax brackets. That is exactly what is supposed to happen in our society: when the incentives are right you take chances, you make money, you move up the socioeconomic ladder. That is just one of the successes of the tax policy.
Another reason tax refunds are lower than expected, however, is the bite from the AMT, the alternative minimum tax. That tax was designed, as was supposedly the original income tax, to only impact the very wealthy, targeting those that were avoiding taxes through many deductions that reduced taxable income disproportionately to gross income. It is not adjusted for various factors, however, and thus each year more and more households fall victim to the tax as they climb the economic ladder.
This was one of the problems with the tax plan that we and others discussed when it was being passed. There are some exceptions that help such as the elimination of the AMT for small corporations (revenues less than $5 million); that is a big benefit for the small businesses that used the other tax incentives to start up or make a comeback after the recession. For the rest of the populace the AMT is taking a bigger bite. Everyone says it needs to be adjusted at least, eliminated at best, but nothing ever gets done.
THE MARKET
As noted, the indexes were mixed with their action on the week. The large caps and small caps pulled out a decent finish. NASDAQ and SOX bounced off their lows, but still closed below key support. It was not a great week for techs as distribution (high volume selling) renewed after taking a few weeks off.
That distribution does not mean the base that started in January is a failure. While it needs to cease and desist before it gets out of hand, 2 such days do not kill a rally such as the one that started off the March low. It simply means that NASDAQ and SOX, two to the three 2003 leaders, need a bit more time to set up before they are ready for another breakout and rally.
That is the bigger picture. Despite a rough week for the leadership, it was just a week. NASDAQ is still working through its 12 week base, a base that is setting up very much as it did in early 2003. That base started in December 2002, the current one in January 2003; this one is about a month and one-half behind on the calendar from that one. It made the first dip about a month in length, tried to edge higher, then collapsed down to make the first bottom. It bounced, and is rolling over. The 2003 base made an exact double bottom. This one could do the same with a test down toward 1900, or it could check up before that; some of the other indexes are trying to turn here, and that could help NASDAQ bottom earlier.
We are not just talking about SP500 and the small caps holding the 50 day MVA. SOX led the rollover in January, peaking first and start the selling. It led the bottom in March as well, bottoming and showing signs of turning higher ahead of NASDAQ. It is clear SOX has been leading the downside charge this time as well, having already hit its 200 day MVA. The 200 day is a key institutional support level. If SOX is going to hold, this is where it will make a stand. NASDAQ may still move down toward its 200 day, but SOX may just be once again setting the pace.
The point is that it was a tough week with the market having to come to grips with interest rate hike fears, but overall it continues to work on its base. NASDAQ still has work to do, but even with last week's distribution accumulation is still positive. Speaking of interest rates, the Fed is broadcasting that the it is not a done deal it is going to without question hike rates in June or August. Broaddus was clear Friday. "Obviously, as we look at incoming data, if the expansion continues . . . and if we see not only a bottoming of the inflation rate but an upcreep in that rate, it is going to be essential that the Fed react." He further clarified his remarks: "I think at this stage of the game . . . we need more confirmation. We must wait a little longer before we make judgments on whether or not the reports of the March economic data will persist or not." Broaddus was not overly concerned about a surge in inflation, noting there was still plenty of slack in the economy. Broaddus has been very concerned that deflation was still a problem with the economy, but he is heartened by the recent data and the prospects of a solid recovery.
That does not sound like a Fed that is on the trigger of rate hikes. The Fed always takes too long in changing, and it has made it clear it wants to see job creation strong and steady before it starts raising rates. The Fed is getting the market ready, and the market had a bit of trouble when it realized that the Fed had been talking about what it was going to do and the economic data (namely the jobs data) is starting to come together and that the Fed will act. The market has to digest that idea, and that will be what takes it through to the base. Then we see if it can make the breakout.
Market Sentiment
VIX: 14.94; -0.8
VXN: 22.55; -0.28
VXO: 15.67; -0.57
Put/Call Ratio (CBOE): 0.77; -0.07
NASDAQ
Another close below the 50 day MVA. It cut its losses, turned positive, but could not hold the reversal.
Stats: -6.43 points (-0.32%) to close at 1995.74
Volume: 1.881B (-5.22%). Average volume but lower. No distribution, but no real volume surge as it rallied back from the low.
Up Volume: 546M (+59M)
Down Volume: 1.311B (-170M)
A/D and Hi/Lo: Advancers led 1.07 to 1. Advancing issues squeaked out a gain. The action was not negative, just not really positive either. After the week it had, that was not bad.
Previous Session: Decliners led 1.62 to 1
New Highs: 85 (+21)
New Lows: 21 (-10)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Sold below the November and December 2003 tops (1990), hitting 1982 on the low and then rebounding to hold those levels. As noted, accumulation in the current 12 week pattern remains positive, setting up the foundation for the breakout. Whether NASDAQ holds here just below the 50 day MVA (2012) or tests the 200 day MVA (1920), it is still working on the base. If it matches the pattern in early 2003, it will test the 200 day MVA or even down to 1900-1895, setting up a double bottom. While that would cause near term problems, longer tern that would be very good for the index in setting the foundation for the next upside move.
S&P 500/NYSE
After two dojis that held the 50 day MVA the large caps posted a modest gain on solid though just lower volume.
Stats: +5.77 points (+0.51%) to close at 1134.61
NYSE Volume: 1.488B (-4.76%). Volume has definitely kicked up, and unlike NASDAQ, it has not been as heavy on the selling. Tuesday showed some distribution, but volume was still below average. Wednesday and Thursday volume surged above average, but SP500 made solid reversals to hold the 50 day MVA on the close. That is not distributive action, instead showing that buyers came back in and rallied stocks back up from the lows.
Up Volume: 964M (+192M)
Down Volume: 515M (-270M)
A/D and Hi/Lo: Advancers led 2.71 to 1. With the small caps joining in once more breadth was more than nice. Quite a swing during the week: -7:1, -3.5:1, +2.7:1.
Previous Session: Decliners led 1.06 to 1
New Highs: 106 (+38)
New Lows: 51 (-78)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Refused to give in. After some Tuesday distribution the large caps sucked it up and tenaciously held the 50 day MVA (1127) on the close. Friday it posted a decent gain though volume was lighter. We still don't think the pullback has been deep enough, but if it continues to hold 1125 support and stays in the range from there to 1150, it will set up a reverse head and shoulders, a solid accumulation pattern.
DJ30
Broken record. Similar to . . . SP500. Two tight dojis Wednesday and Thursday on rising volume as DJ30 undercut the 50 day MVA (10,392) and rebounded to recover the losses on sharply rising, above average volume. Friday it was up, building on that move on lower though still very strong, above average volume. It too could use more consolidating but is showing strength as it fights off undercutting the 50 day.
Stats: +54.51 points (+0.52%) to close at 10451.97
Volume: 234 million versus 263 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Earnings and economic data continue.
Earnings pour it on this week and economic data is no slouch either with the important leading economic indicators and durable goods orders. More fuel for the downside or will investors finally get comfortable with the idea of a strong economy ultimately produces stock gains even with rate hikes, particularly rate hikes that just get rates back into the same ballpark with real rates?
Even with last week's selling, the basing process continues, but there was an important development with SOX hitting the 200 day MVA and rebounding sharply. The SP600 tested the 50 day MVA and then bounced higher as well. Small caps keep getting more money put to work because more money keeps moving into small cap funds. Big money moves the market, and the cash inflows show it is still coming in. When that money is put to work it leaves tracks, and that is what we have to focus on.
NASDAQ is at an optimal place to rebound, having formed half of the right shoulder to a reverse head and shoulders base. With SOX having tested and jumped off the 200 day and the small caps bouncing off the 50 day MVA, all three are potentially in position to continue putting together the latter portions of their bases and set up a breakout. We want to reiterate that if they do hold here it is not a breakout, but just completing the bottom and starting up the right side. Again, NASDAQ may still test the 200 day MVA itself and complete that double bottom as it did in early 2003 before moving to complete that base.
Keep focused on where the market is overall, not what happened today.
Overall, however, the action has maintained a positive theme despite the pessimism regarding interest rates, the consumer, Iraq, the election, the economy. We stress in our seminars about how important it is to look at the life history of a stock and the market and see just where they are in order to make sound decisions. We all tend to focus too much on the day as opposed to the week, month, year. That is no wonder given all of the minute by minute detail provided via financial stations, the web, etc.; it is so easy to get tunnel vision and be swatted back and forth without any anchor even as the overall trend remains.
That is why we are emphasizing the overall pattern here: a base very similar to early 2003 with positive accumulation even as all kinds of worries swirl about. Yes there are obstacles confronting us just as there were in early 2003. But just as then we overcome them and continue doing what we do best: innovate and out hustle the rest of the world. The economy is still growing. Fears of a fading consumer the past year have simply not materialized. More importantly, the supply side continues to expand, and as we have written before, if the supply side is investing and producing, demand follows. As for Iraq, we all recall how after a brilliant early campaign, reports of supply line attacks by armed thugs in souped up pickup trucks had the nation in a gloomy fog. Then we rolled through Baghdad and there was euphoria. The current phase in Iraq is very similar; this is not a widespread uprising across the country. These are Hussein holdouts and others that are making their power plays, some with backing from Iran or others that do not want to see a democracy take root. We have talked with several US citizens who have voluntarily gone to Iraq to help rebuild and teach how to self govern. They tell us that by far and away the vast majority of Iraqis are embracing free markets and democracy. They tell us they openly say that want to 'walk hand in hand with America' and that grown men carry photos of Bush and other US leaders and talk of how they have risked their careers to free them. That indicates to us that the will is there; after 40 years of brutal dictatorship it just takes a while for the dust to clear. We don't mean to be political or make commentary on whether we should be there at all, but given that we are and given the market is in part playing off of this, we have to look at probable outcomes.
The remaining element of where we are now involves the time of the year. Typically May to October is a slower time for the market. Summer comes, volume gets light, few catalysts to support sustained moves. There is often a summer bump but then it gets rough in the end of the summer and early fall. That is the typical case over the course of history. 2003 was atypical because we were coming off a nasty bust in the market and economy. 2004 has its own specifics, not the least of which is the election. While election years are typically good for the market, the first quarter of this year has thus far been one where the gains of 2003 are being consolidated. A 70% gain on NASDAQ cannot be consolidated in month, and the market is still digesting that run. Leaders continue to perform for the most part, and over the next month the market will have put in most of its base. Then we will see if it can buck the historical trend and breakout during the summer. Even if it does that it then goes through the mean season of September and October before the holiday run. That sets the stage for a challenging period ahead even with this good basing action. The key is that the market has to put in this base; in the long run that is good for stocks to continue the expansion along with the economy.
End part 1 of 3
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us stock market
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