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us stock market, trend trading stock
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5/03/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: VXGN
Buy alerts issued: RDEN; RWY; CVNS
Trailing stop alerts: VION
Stop alerts: APPA; MAMA
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:
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SUMMARY:
- Relief bounce on decent though lower volume.
- National manufacturing remains strong, March construction surges.
- No change in character as stocks bounce but lack punch ahead of FOMC.
- FOMC statement change is priced in, but will stocks move higher on the news after selling on the rumor?
- Subscriber Questions
Stocks bounce but not convincing.
After a tough clubbing last week stocks started the week stronger. After all it is late spring and a new week provides new promise. An early price surge overcame some selling after a very strong construction report and rock solid ISM (national manufacturing) and rallied well ahead of lunch. Volume was light, and when the buyers ran out of gas the sellers did their work. NASDAQ gave back its opening price but managed to hold positive on the session low (having gapped higher) and undercut the 200 day SMA it had just fought to recapture. With little volume and no catalysts the market was ready to pitch in the towel on the bounce attempt.
In the last hour volume reappeared, however, and stocks managed a decent late charge. Volume jumped sharply, stocks jumped off their lows and the market finished in a decent posture to start Tuesday having managed to recoup some of the lost gains. In the end volume was still below Friday volume though trade was decent. All in all it was not enough to reverse the tide from late last week, and it was certainly no signal that the market bottomed and is ready to rebound. It was a relief bounce that, with the late recovery, set up some more upside ahead of the FOMC results scheduled for Tuesday afternoon.
THE ECONOMY
ISM survey still strong in April.
62.4 versus 62.7 expected and 62.5 in March, but still strong across the board. April marked the eleventh consecutive month of expansion, a string not seen since 1983 (another one of those growth rates not seen since the Reagan tax cuts). The employment sub-index hit 57.8, the highest in the manufacturing sector since 1987. The only sub-index that was lower was inventories, and that is actually good for manufacturing as it will have to keep producing more and more. As for inflation possibilities that is not so great as the worry there is bottlenecks may develop as part demand exceeds supply. That is the real fear here: businesses, despite some investment incentives, have still played so cautiously that demand is outstripping supply. Businesses need to know that stimulus is going to stay in the pipeline (not in the form of artificially low rates, but by tax incentives if you put money to work in upgrading your business or taking new chances) so they will really pull the investment trigger and get that supply up to meet demand. That is how you beat inflation pressures.
Construction spending shoots higher in March.
1.5% swamped the 0.5% gain expected as better weather allowed construction crews back on the job. The key segment is always private residential construction, and it gained 0.7% for the month. Public spending jumped 5.2%, but it is a smaller segment of the overall construction pie. Yes the jump was greater than expected, but this is just a part of a continued trend higher that just picked up some speed because of the bad weather.
THE MARKET
The market provided a relief bounce Monday as stocks rallied back a bit from last week's losses. It was no show of strength, however. Volume did increase late in the session to make the action more respectable, but volume was lower overall and NASDAQ barely held the 200 day SMA, having to rally back late to once again retake and close over that key level.
Short and simple, it was not a strong session. The lower volume shows there was no reversal or change of character that would indicate the bottom of the base. SP500 bounced off that weekly up trendline noted over the weekend but it too suffered from lower volume. SOX was again trying to put together an upside move, but again it failed to do so and closed again below the somewhat significant 450 level after moving above it intraday. Basically the market was a bit oversold and bounced higher as the sellers backed off. Even that bounce was touch and go as noted above, and it still left much of the early gain on the table by the close.
Again, the market did not show what was needed to indicate a change for the break below recent support levels on rising volume. I did, however, hold some key levels and rebound. Whether that rebound depends upon whether volume comes in, and much of that will turn on the response to the Fed's change of statement on Tuesday.
Market Sentiment
As noted over the weekend, fear was higher but nowhere near the levels seen at a market turn. They have reached levels to provide a bounce, and that is why we were expecting the start of a rebound after the hard selling. Monday they backed off as stocks bounced. Now we see how much upside this bounce delivers before it runs out of steam if no volume comes to its rescue.
VIX: 16.62; -0.57
VXN: 25.72; -0.01
VXO: 16.63; -0.93
Put/Call Ratio (CBOE): 0.81; -0.21
NASDAQ
Rallied off the Friday low and recaptured the 200 day SMA, but it was a struggle.
Stats: +18.57 points (+0.97%) to close at 1938.72
Volume: 2.024B (-7.53%). A late volume spurt, a buying volume spurt, pushed volume to respectable levels though still lower than the hard distribution from Thursday and Friday. It was a good start to a rebound, but as noted above, it must have more support for the rebound to have any significant impact, i.e., a bottom to the base. Otherwise after a bounce up near 2000 the rebound is in trouble.
Up Volume: 1.267B (+947M)
Down Volume: 738M (-1.112B)
A/D and Hi/Lo: Advancers led 1.22 to 1. Blowing no one away with the modest upside breadth.
Previous Session: Decliners led 2.31 to 1
New Highs: 51 (+7)
New Lows: 75 (-7)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Never threatened breaking down to the next support level, instead gapping higher and rallying to over the 200 day SMA (1934). It cleared 1950 (1954 on the high) but then gave back 28 points high to low before finding its footing and recovering late to retake the 200 day. Volume was lower but solid; that is not enough, however, because the Thursday and Friday selling was on much higher volume. The undercut of the 200 day and reversal is good price action, but it is not giving the kind of volume that supports a definite rebound in the sense of staying power. The price action is not bad. The volume at over 2B shares was not bad. It just was not good enough to indicate that stocks had bottomed and turned the corner. More trade can come into the index; indeed, Monday late volume opened up as stocks jumped off the session lows. There was obviously some institutional buying at that point. It will need even stronger trade on a further gain Tuesday, and a lot of that depends upon the reaction to the Fed's policy statement. It appears investors have built in the change of statement, but whether they rally on that is another thing altogether.
S&P 500/NYSE
Volume was lower though above average as SP500 made a solid bounce that kept it well above the march lows and near support. Nothing definitive but a nice answer to the selling.
Stats: +10.19 points (+0.92%) to close at 1117.49
NYSE Volume: 1.567B (-4.16%). Volume backed off but remained above average as it bounced off the weekly up trendline from the early 2003 lows. It was not the kind of volume that shows a clear shift in the tide. It has to ramp up as SP500 approaches 1125 to 1130 or else a test lower to the March lows.
Up Volume: 1.007B (+539M)
Down Volume: 537M (-607M)
A/D and Hi/Lo: Advancers led 1.52 to 1. Modest upside volume, matching the decline Friday. Needs better volume and breadth to make the break.
Previous Session: Decliners led 1.41 to 1
New Highs: 32 (+3)
New Lows: 110 (-17)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Held the weekly up trendline from the early 2003 lows where the market bottomed after the first rally off the downtrend low in October 2002. It was a crisp jump, closing near the high. Looks good but will need more volume if it is to really take on 1125 to 1130, a range marked by price resistance and a glop of moving averages. Despite a solid look Monday, it was still mediocre when compared to the selling the preceded it. For now it is in the rebound mode, having yet to shift gears and change character.
DJ30
Up over 10,250 with the rest of the market, but DJ30 volume was unable to crack average as it rebounded. The weakest bounce of the major indexes (though SOX was a picture of indecision itself), DJ30 has serious overhead from 10,370 to 10,570 (the April high). Without some serious volume and help from the other indexes, the look is not very promising. Still needs more of a correction down toward 10,000 where the March lows and the 200 day SMA (9979) reside.
Stats: +88.43 points (+0.86%) to close at 10314
Volume: 218 million Friday versus 231 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economic data train rolls on with Factory orders at 10ET and then the FOMC results at 2:15ET. The key for the day is of course the latter; the selling the past month has been attributed to a fear of imminent rate hikes. No one anticipates a rate hike, and indeed the FFF contract does not have one priced in at this meeting but instead in June. Right before the meeting the FFF contract is very accurate. Outside of a week to ten days from the meeting it is often inaccurate as it continually adjusts to each change in data.
The key is the statement with a 'consensus' of economists expecting the Fed to lose its patience, i.e., take any reference to being patient out of the statement and say the risks are tilting toward inflation. Without that second month of strong job growth under its belt, however, the Fed might not want to be so bold. If jobs miss then it is out on a limb once again, claiming there is a threat of inflation but not having met its primary criteria to raise rates, specifically a series of 3 strong jobs reports. So, don't be surprised if the Fed does not play up any tilt toward inflation Tuesday.
How the market handles that is the continuing question. It has built in a change in statement the past month, having sold ever since the strong gap higher on the March employment data. Even if the market views this as positive in that its discounting of the statement change was correct, how long would this carry the market higher with the prospect of the real rates hikes all that more certain in the near future? That is the question we just have to be patient and see how the market answers. It has discounted some part of the rate hikes, but how much in light of the continued economic expansion remains to be seen.
That basically makes us all market watchers even more than usual. Volume is still the key as stocks bounce. While the market rebounded on lower trade, many report stocks jumped back on rising volume. An interesting aspect to the overall lower volume market bounce that could foreshadow a stronger market move. Again, that simply remains to be seen. For now we know the market bounced on lower overall volume, and that is just a relief bounce to the more severe selling. There needs to be a real buying surge to show a shift in character to the buyside, but with the heavy week of economic data culminating in with the jobs report Friday, that may not be coming. Indeed, a drift higher on lower volume would put the market in the uncomfortable position of having made a low volume rebound ahead of serious economic news. In other words that could make the jobs report the catalyst that sends stocks back down if they make a low volume rise into the news. If we get that action on into Thursday, we will be looking to lighten up on some positions ahead of the jobs report.
Support and Resistance
NASDAQ: Closed at 1938.72
Resistance: The 200 day MA (1934) is still a key point that it is trying to hold at. Some prices from the March consolidation attempt (1943) tried to act as some support on the way down, & thus may act as some resistance. 1978, the April closing low. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (2000) and 50 day EMA (2005). 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: Mixed tops and bottoms at 1900. The March low (1896). 1850 below that.
S&P 500: Closed at 1117.49
Resistance: 1118 is the April closing low. 1125 represents some price points. The exponential 50 day MA (1127) 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. 1106, the weekly up trendline from the early 2003 lows. 1096 to 1100, then the March low (1087). 1075 to 1070 from the December consolidation. The 200 day SMA (1074).
Dow: Closed at 10,314.00
Resistance: The exponential 50 day MA (10,383) and simple 50 day MA (10,389). 10,570 is the April high. Price consolidation at 10,600 level. September/November up trendline (10,760). 10,747 is the February high.
Support: 10,250 is trying to hold. 10,000 to 9900-9850. The 200 day SMA (9979). 9859-9855.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
5-03-04
Construction spending, March (10:00): 1.5% actual, 0.5% expected, 0.4% February (revised from -0.1%).
ISM, April (10:00): 62.4 actua, 62.7 expected, 62.5 March.
5-04-04
Factory orders, March (10:00): 2.4% expected, 0.3% February.
FOMC meeting results (2:15)
5-05-04
ISM services, April (10:00): 65.0 expected, 65.8 March.
5-06-04
Productivity, preliminary Q1 (8:30): 3.5% expected, 2.6% Q4
Initial jobless claims (8:30): 335K expected, 338K prior.
5-07-04
Non-farm payrolls, April (8:30): 165K expected, 308K March.
Unemployment rate, April (8:30): 5.7% expected, 5.7% March.
Hourly earnings, April (8:30): 0.2% expected, 0.1% March.
Average workweek: 33.8 expected, 33.7 March.
Wholesale inventories, March (10:00): 0.5% expected, 1.2% February.
SUBSCRIBER QUESTIONS
Q: When [you use] a Stop, do [you] recommend a stop loss or a stop limit?
A: A stop order is a type of sell order that is placed below the current price of an equity and is used to preserve gains or protect against downside moves greater than what the investor desires to suffer. There are 2 types, a stop loss and a stop limit. The first is a market order; i.e., it is triggered if there is a trade at the exact stop loss price set by the trader. If there is no trade at that price as in the situation where bad new hits and a stock gaps below the stop loss price, the stop loss order is filled at the next sale price. That can hurt as it's obvious you can get taken out at a much lower price than planned. A stop limit order is different in that it sets a limit where the sale is triggered if a trade is made at a specific price, but not lower. In other words, if the stock gaps below your stop limit price, you won't get taken out on the next trade but only if the stock then rebounds to trade at your stop limit price.
Neither of these stop methods are perfect since both put you at the whim of the market and the market maker. It is not unheard of for a market maker handling a thinner stock to run a price down to take out a stop order, particularly if he or she sees good buy strength. Indeed, that is how I was introduced to stop loss orders. I had a stock making a nice run with 20% under its belt. A broker convinced me it was the safe thing to do to go ahead and insert a stop loss. Within 15 minutes I was out with roughly a 10% gain and the stock was back up to where it was trading when the stop loss was put in. Since then I typically use mental stops, placing the order to sell when the stock trades where I don't want it to start heading.
When actually entering stops ahead of time we prefer to use stop limit orders, even though similar stop orders they won't always work as planned. Because a stop limit does not turn into market order if the stock gaps below it, it can prevent one from getting the worst trade of the session, something stop losses are infamous for when a stock gaps lower. An example would be if some after-market news caused a stock to drop 5 points below your stop. The stop limit prevents you from being stopped out at the lowest trade, and if on the next day's open the stock rebounds back up say 6 points, you would still be taken out at your original stop limit price, if the stock traded at that price, even though the stock rebounded above it. At least the exit was what you had originally anticipated. Of course you can also cancel the original stop limit if you have time then see how high the stock rebounds and set a new one. Indeed, if there is a gap lower coming and we have stops physically in place we will often cancel them and then just see what the stock does in the first hour and then decide what to do with the position.
End part 1 of 3
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