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4/29/04 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full reports issue Monday, Wednesday and Saturday. A market summary is issued Tuesday and Thursday along with a few choice plays for the next session.
MARKET ALERTS
Targets hit alerts issued Thursday: None issued
Buy alerts issued: CECO
Trailing stops issued: NMSS
Stop alerts issued: OO; RHD
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:
- More volume selling pushes market past near support.
- GDP comes in lighter, but hard to placate investors right now.
- Near support gives way as NASDAQ toward 200 day, SOX below March lows
- Oversold bounce is coming, but would prefer NASDAQ to undercut that 200 day SMA.
Economic news softens but selling does not.
GPD came in solid but cooler than expected, but investors found no solace. After a brief test of the next near support level bounced stocks higher, that support could not hold on the second test. Mid-session was spent trying to recapture that level, but just after 2:00ET the bottom opened up and stocks rushed through toward the next support level. That roughly coincided with a terror threat to some Los Angeles shopping malls. That support level dutifully held for now, bouncing stocks up toward the close. Once more a late, modest bounce after some higher volume selling. At some point one of these support levels will hold. For now the distribution (high volume selling) is overwhelming one support level after another as the market goes for a full test of the prior lows.
The selling was led by SOX, NASDAQ, and the small and mid-caps. Those were the leaders in 2003, and the market has been unable to make any headway without those groups performing well. Despite all of the rhetoric about large caps taking over the lead, the large caps are unable to provide what the market needs. If the economy goes into neutral, then the large, dividend paying stocks will find more favor. As long as the economy is still in a strong expansion mode, however, dividend stocks have historically underperformed. You don't want to be in a situation where you are led by these companies; if we get there we will make do, but that is not the best market for making big money. Indeed, even with the tax changes that are more favorable to dividend stocks, the 'fine print' of the law makes them not nearly as desirable as many thought at first blush.
In sum, stocks broke near support, sold to the next support level, and managed another small oversold bounce on the close. Volume spiked higher on NASDAQ and remained solid on SP500. The market is getting oversold and will start a rebound over the next few sessions, but it looks intent on a NASDAQ test of the 200 day SMA or the March lows before it is ready. SOX rallied back some from its undercut of the March low, hinting at a double bottom attempt. As of the close, however, those were just possibilities as the selling ahs not abated and the rebound was still more of a late modest bounce as opposed to a serious reversal attempt.
THE ECONOMY
Q1 GDP 4.2%, well below expectations.
The monthly inventory reports showed very solid inventory gains, and that is what pushed GDP estimates higher. When the report issued, however, inventories were still at the lower levels. Two points. First, the strong inventory growth really manifested itself later in the quarter, and this is still a preliminary report with revisions to come as that later data is taken into account. Second, the government is most likely underestimating growth of inventories as it has done all along. It typically increases its inventory read with the last revisions.
The market may have known this and that is why it was cool to the report even though 0.8% lower than expected. If the market anticipates 5+% as the number by the final revision, the preliminary number is not going to sway it much. Moreover, the GDP price deflator jumped to 2.5% from 1.5% when 2% was expected. This indicates that there is more pricing pressure building overall. It is important to note, however, that prices for the business sector slowed their growth, and that implies prices the consumer pays won't face upward pressure from this source.
Wage price gains show improving jobs market, not inflation.
Q1 GDP also included data showing that employee costs (wages and benefits) rose 1.1% versus 0.8% in Q4. That caused many to fret over inflation pressures due to higher wages. This was one of the Fed's constant whines during its campaign against prosperity. The Fed kept repeating that higher wages ultimately leads to inflation. History provides no empirical evidence of this. As with many of the Fed's battle cries against potential inflation during the late 1990's, historical data provided no support, and the real time data failed to provide any indication of inflation either. This is a pet Fed theory that has never made it from theory to the real world. The idea is that if you pay workers more either by choice or worker demand, then you have more dollars chasing the same number of goods, and that is inflationary.
This is another economic theory fraught with gaping holes that simply don't translate to the real world. Unless you reach a point where there is no further productivity gains and there are too few workers available to fill all spots needed and existing employees can demand and receive higher wages, there will be no inflation from wages. With a few million jobs lost and just a half million created, one could hardly argue that is the case right now in the US. Even if that were the case, however, history shows no inflation based on this scenario because the market tends to adjust to meet the employment needs. Money will be spent to train new employees, to shift others, etc. Money flow is very efficient; if one sector is short workers, the market produces skilled workers to fill those slots. There may be temporary shortages that can lead to wage increases in that particular sector, but over the entire economy it is preposterous to claim that every sector in every industry would be maxed out when we know that at least 100K new potential employees hit the job market each month.
What the price gains really show is one of the signs we have been looking for with respect to an improving jobs market, i.e., that wages are starting to increase due to overtime and rewards to employees that have been stretched so thin you can see through them. That is what causes wages to rise (along with benefit costs skyrocketing), and with this many unemployed workers, that is hardly inflationary. What that causes is higher employment as more workers are hired to help those that have been worked to the point of mutiny. The rising wages show that there was more work being done and that those at work were demanding more. Historically those are signs that the job market is ready to open up. Thus we feel a bit better about the March jobs report being more than a one-month wonder.
THE MARKET
The volume selling continued, and unlike the early 2003 bottom that formed on fear but a lack of participation, there is a lot of downside participation this time around. In early 2003 those that were in the market mostly held onto the stocks they bought off the October bottom. Right now there is dumping of shares that were acquired on the run and even this year.
Why the difference? Back in 2003 there was just the Iraq war to worry about. The economy was a worry, but it is still a worry now as some fear the prosperity cannot last due to consumer debt, etc., while others fear it is too strong and will have to be administered by the Federal Reserve, never a savory prospect. So, today there is the war, the economy still (now rate hike fears and their impact on earnings), China's economy, and the election. There are probably more, but those are on the front burner every day. The market is digesting the strong 2003 gains and is also dealing with new threats to a continued recovery. The distribution, accumulation, then more distribution shows some indigestion.
The Thursday action with SOX undercutting the March lows and rebounding some shows a potential double bottom setting up. NASDAQ broke its near support and looks to be heading for a 200 day SMA test, and a 1900 level test of the March lows is not out of the question. SP500 and the small caps broke support and have a lot of air before they sell to comparable support levels.
The market looks ready to test lower as it tries to find the bottom, but it is also getting really oversold. We would prefer NASDAQ to make it to the 200 day SMA (1932) before it bounces; a follow through to the Thursday selling could do that. Then it rebounds ahead of the jobs report. Again the same question: is it building in a positive reaction to a strong jobs report? If it finds bottom and rallies to the report it leaves itself open for selling. It also ahs set up the reversal and would be ready for a follow through rally if it likes the report. Right now the market disdains solid economic data because it still fears rate hikes, a renewed fear this week brought on by China's concerns over its hot economy. A year ago we were wishing we had to worry about rate hikes. Be careful what you wish for. The market is set up to make the move higher, but will it do so? Another test lower and the horse will have been led to the water; will he drink?
Market Sentiment
VIX: 16.6; +0.31
VXN: 24.9; +0.98
VXO: 17.3; +0.58
Put/Call Ratio (CBOE): 1; +0.12. Starting to get to the level where it is indicative that a bounce is coming. It is always amazing how the put/call ratio tips to put buying after the serious selling has been well underway.
NASDAQ
Broke through the April lows and is heading to the 200 day SMA, though it did try a big of a late bounce.
Stats: -30.76 points (-1.55%) to close at 1958.78
Volume: 2.385B (+16.67%). Volume surged to the highest level since January when the market peaked. Extremes are indications changing trends. Think of it as the weather: when seasons change the weather is at its most violent as hot and cold air clash. During the middle of each season, however, the weather is stable. When the change to the next season starts, the weather starts to get turbulent. Same with market trends. That is why we always watch for extremes in volume, breadth, and sentiment. Those can indicate a change is here. NASDAQ sold on volume early in April. It rebounded right back on even stronger accumulation volume. Then it rolled back over, again on rising volume. That is turbulence. Thursday it knifed through support on the strongest trade since . . . the last time of change, back in January when the market peaked and showed high volume spikes on both upside and downside sessions. This high volume on a reach toward the 200 day SMA is indicative of the bottom coming. A pass through the 200 day SMA followed by a rebound on surging volume once more would be a very good sign of a bottom.
Up Volume: 364M (+91M)
Down Volume: 2.004B (+241M)
A/D and Hi/Lo: Decliners led 2.75 to 1. Was over 3:1 but improved on the late bounce.
Previous Session: Decliners led 3.86 to 1
New Highs: 55 (-12)
New Lows: 65 (+24)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Popped another support level (at 1978) and came close to the next at 1943 on the low (1946) before a late rebound. It is not far from the 200 day SMA (1932), an important support level that is riding just over the March lows (1986). We would be very surprised to see NASDAQ reach that lower level before needing an oversold bounce at the minimum. It could cut the 200 day and be done with the selling altogether if we can get another high volume down session that pushes NASDAQ down another 30 points. With the put/call ratio hitting 1 on the close, with volume spiking to levels not seen since the last change in direction, at a minimum there is an oversold bounce coming. We just want it to get it out of its system now with a further plunge as opposed to putting it off.
S&P 500/NYSE
Fell through 1125 and the April low on once again very strong trade, it too tapping at the next support point and posting a modest gain.
Stats: +0.07 points (0%) to close at 1113.89
NYSE Volume: 1.859B (-0.08%). Another big volume session, showing the strongest volume since the January high volume month as SP500 made its peak for the 2003 run. Similar to NASDAQ, this return to high volume as stocks churn up and down indicates the process of change. As it has been moving laterally for over three months that means upside or downside. The NASDAQ action suggests upside, so that would be the inclination of SP500 as well.
Up Volume: 377M (+130M)
Down Volume: 1.428B (-176M)
A/D and Hi/Lo: Decliners led 2.8 to 1. Still ugly, but recovered very well on the close.
Previous Session: Decliners led 3.21 to 1
New Highs: 43 (-11)
New Lows: 180 (+20)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Undercut the April low (1118) on its way to 1108. There it held over some support at 1106 and managed a rebound though could not recapture this month's low. It still needs more downside as right now it is in the middle of its range. A test of at least 1100, preferably 1090 would be preferred to finally give the large caps a good shakeout. Not as oversold as NASDAQ, but if NASDAQ gets in trouble again early Friday, that could get SP500 down below 1100 that would help set up the bottom in this base.
DJ30
Again tested 10,250, slightly undercutting that level on the low (10,219) before rebounding on the close. Volume was again above average, but no close to the recent volume spikes earlier in the month. A test down to 10,000 (200 day SMA at 9967) would be provide more of a shakeout similar to what SP500 needs, but that would entail over 250 downside points, and DJ30 has simply not been selling as hard as the other indexes.
Stats: -70.33 points (-0.68%) to close at 10272.27
Volume: 231 million Thursday versus 232 Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
A few more important economic reports out Friday including personal income and spending, another sentiment reading (Michigan final), and the Chicago PMI. All important, and at some point good economic data will be viewed as actually good for the market. Would like to see that hold off until the jobs report the following Friday, giving the market a more or less oversold condition to rally against. With the rising selling volume, spiking put/call ratio, and NASDAQ and SOX at or approaching key support, the odds of the market waiting around for a week to at least give an oversold bounce are thin.
Again we anticipate at least an oversold bounce starting at some point over the next few sessions. Another sharp selloff that takes NASDAQ to the 200 day SMA or lower and then a rebound on volume would be solid action, but it will most likely take some kind of disappointment with the morning economic reports to provide that kind of additional downside push.
The market has been tough on stocks, but there is a surprising number of stocks that are holding up quite well relative to the performance of the broader indexes and majority of stocks. With respect to existing plays we have been taking a macro view. As long as they are holding above key support (e.g., moving averages or price support) or making low volume breaks, we are letting them run. On the low volume breaks below support we want to see them recover in short order to show us the move was an aberration in the overall action. In short, we are not micromanaging; positions that overall still show good accumulation and are not breaking down are going to rebound well on the next bounce. It will either be an oversold bounce that gives us a better exit point for some plays either to take profits or cut losses, or it will be an important bottom that takes hold and we can add to positions or just let positions run as we look for new stocks. As with the market, it is always best to remind yourself of what the bigger picture is so you are not caught up in the minute by minute action that can change dramatically but still occur within the larger trend or pattern.
Support and Resistance
NASDAQ: Closed at 1958.78
Resistance: 1978, the April closing low. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (2004) and 50 day EMA (2011). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high. 2154 is the January high.
Support: Some prices from the March consolidation attempt (1943). The 200 day MA (1932). Mixed tops and bottoms at 1900. The March low (1896).
S&P 500: Closed at 1113.89
Resistance: 1118 is the April closing low. 1125 represents some price points. The exponential 50 day MA (1128) and the simple 50 day MA (1130). The April and January highs (1150 to 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. 1096 to 1100, then the March low (1087). 1075 to 1070 from the December consolidation. The 200 day SMA (1072).
Dow: Closed at 10,272.27
Resistance: The exponential 50 day MA (10,392) and simple 50 day MA (10,392). 10,570 is the April high. Price consolidation at 10,600 level. September/November up trendline (10,740). 10,747 is the February high.
Support: 10,250 held intraday again as the April low last week. 10,000 to 9900-9850. The 200 day SMA (9967). 9859-9855.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
4-26-04
New home sales, March (10:00): +8.9% (1.23M) actual, 1.168M expected, 1.163M February.
4-27-04
Consumer Confidence, April (10:00): 92.9 actual, 88.5 expected, 88.5 March (revised from 88.3).
Existing home sales, March (10:00): +5.6% (6.48M) actual, 6.2M expected, 6.13M February (revised from 6.12M).
4-29-04
GDP-Advance, Q1 (8:30): 4.2% actual, 5.0% expected, 4.1% prior.
GDP chain deflator, Q1 (8:30): 2.5% actual, 2.0% expected, 1.5% prior.
Employment Cost Index, Q1 (8:30): 1.1% actual, 0.9% expected, 0.7% prior.
Initial jobless claims (8:30): 338K actual, 343K expected, 356K prior (revised from 353K).
4-30-04
Personal income, March (8:30): 0.4% expected, 0.4% February.
Personal spending, March (8:30): 0.7% expected, 0.2% February
Michigan sentiment revised (9:45): 94.0 expected, 93.2 prior.
Chicago PMI, April (10:00): 61.0 expected, 57.6 March
End part 1 of 2
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