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5/05/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: MYGN; ENR
Trailing stops issued: None issued
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:
- Market again likes stronger economic data, but still cannot attract upside volume.
- Services sector on fire as economy expands, deficit continues to fall.
- Indexes in need of catalyst as steam running out on relief bounce.
- Subscriber Questions
Indexes mostly post gains as market continues favorable response to good economic data.
The Fed's 'clear' statement (at least for the Fed) that it was time to start raising rates but that it was not going to unload on the market has put an ever so slight bit of starch into stocks. They have even responded positively to the solid economic data the past two sessions. Definitely a change from the notion that good economic news was bad for stocks.
It has not been a panacea, however. Stocks have moved up the past two sessions in response to good news, but it is no watershed event. The moves have been volatile and sporadic. Volume has failed to move back in as stocks post modest gains. After the strong selling the last week, the failure of volume to rally as stocks bounce is a classic relief bounce scenario where stocks bounce back but there is no resumption of accumulation. When those few buyers are exhausted, the moves stalls and usually that means a resumption of selling. If the modest rise runs into resistance without volume, that is even more troubling as stocks are trying to break a pretty thick layer of ice stocks with a rubber hammer.
The action was volatile, SP500 took three shots at 1125 resistance and failed, and volume was lower. The market needs a catalyst to give investors a reason to buy. High oil prices, unrest in Iraq, Saudi Arabia and elsewhere, election year badgering are all hanging over the market. The one item on the horizon with the power to make the difference is the Friday jobs report. The first question is whether it will be strong, so-so, or disappointingly weak. The second question is how will the market respond in the event of stronger than expected or lower than expected growth?
THE ECONOMY
There are ideas all over the map as to what the job number will be. Expectations have been creeping higher once again, and there are economic signs that show improvement in jobs. The Challenger survey, Manpower survey, ISM reports, regional manufacturing reports all show increasing jobs. Wages are rising (albeit modestly) and the workweek is up, indicating that more workers are required. The ISM Services reports showed rising wage costs and hiring freezes being lifted. The new Rasmussen survey shows its employment index at a high of the year. 33% of workers say their company will hire, up from 29% in December. 39% say their company is currently adding workers, up from 32% in December. Most significantly, the number of workers worried about losing their job is at 18%, much lower than any point in the last year.
These are key indications of hiring that is currently ongoing. We noted back in 1999 and 2000 that the Fed's attack on the 'runaway' consumer by raising interest rates was just a cover for ulterior motives to slow the US economy. The consumer does not stop consuming until his or her jobs is actually under threat, imminent threat of termination. That is what scares the consumer into its shell. With fewer and fewer workers fearing loss of their job, that is a pretty clear signal that companies are indeed hiring. Consumer sentiment figures have recently topped expectations, particularly with respect to the current conditions element, the one most closely tied to jobs. Thus the Rasmussen survey is right in line with other anecdotal evidence.
Okay, so that means there are jobs being created. How many is the main question, and what quality is the other. March was a big number. April could easily top 200K given the continued improvement in the anecdotal evidence, and that would be another 'big' number given current expectations in the 160K to 170K range. It would certainly be enough to soak up the new job seekers and some of those that have been out of work as well.
The quality of jobs is concerning many. Most of the new jobs are in the service sector where pay is on average lower than manufacturing. Manufacturing is showing increases in hiring once more as the national and regional surveys show. Manufacturing continues its 50 year decline, however, so the bulk of new jobs will not go to that area. Thus the lament is that many of the new jobs are lower quality than the old jobs. That is often the case in the initial phase of a recovery as the economy once again shifts to another segment to propel its growth. Those service jobs and new technologies, however, ultimately provide much better jobs than before as seen in the last major shift in the economy that started in the early 1980's. The move into the next economic phase is always difficult as it was in the 1980's, but by the end of the decade and through the nineties that was a forgotten lament.
Services on the rise still, hitting record levels.
As noted, the service sector in April was much stronger than expected, rising to 68.4 as opposed to falling as anticipated (65.8 in March, 65.0 expected). That is the thirteenth month of expansion and a new record. New orders rose to 65.6 from 62.8. Backlogs jumped to 53.5 from 52.5. Solid numbers. Prices paid rose as well, up to 68.6 from 65.7. It is interesting how news stories covering these reports have changed. The prices paid rise gets the headlines while the other elements are downplayed or are put in almost as footnotes. The worry is inflation now; that is the popular buzz. As seen in the 1980's and 1990's, however, real growth trumps inflation as long as our leaders don't get too cute and try to control the markets. As noted, many companies are noting hiring freezes being lifted as well.
Those 'horrible' deficits are starting to fall to economic growth.
You have heard it one thousand times if once that the deficits are only going to get bigger and choke off investment, strangle the economy, and generally shackle future generations forever. Heard the same thing in the 1980's, just as the economy was exploding into 20 years of growth that turned deficits to surpluses. The idea that keeps getting foisted upon the country is that tax revenues lost to investment into the country are lost forever, never to come back. Once again, history is showing that to be simply wrong.
When an economy is in recession, jobs are lost, companies make less money, people buy less and thus income taxes and sales taxes decline. Taxes are based on percentages of what is bought or earned. Lower those and taxes receipts fall. If spending continues at the same or increased pace, deficits rise.
When an economy starts expanding again, companies start to spend on goods, companies hire, consumers get jobs, consumers spend more, wages rise. Thus there are more taxable events, and the size of the pie being taxed expands as well (higher wages, larger purchases, etc.). That means more tax revenues. History repeats itself this year. Tax receipts are up 12% year over year. That means the deficit is $100B, that is billion, less than thought. That shows the power of economic expansion to knock down deficits. A bit of fiscal restraint and the budget is balanced in 2 years not the 5 years expected.
THE MARKET
As noted, the market needs some catalyst to rescue it from the low volume bounce this week. It has been unable to generate accumulation as volume overall fades on the bounce toward near resistance. SP500 hit key resistance at 1125 three times Wednesday and was unable to push through due to a lack of upside participants. NASDAQ is showing a doji, closing well off of its intraday high without even challenging its 10 day EMA on this bounce. SP600 (small caps) are showing a doji below the 50 day EMA after tapping twice at that level on the highs the past two sessions. Those are not the patterns of indexes that, without some change, are ready to charge higher.
Stocks overall showed the same action with flat to modest breadth on the indexes. Several leadership stocks as are on the report rallied on stronger volume. In some cases solidly higher, above average volume, but in others just rising volume. As usual the leaders show better action than the rest of the market, but even they are not unequivocally showing strength on the bounce.
All of this is pointing to a real problem for the stocks unless there is a catalyst to change the character. As we all know, the jobs report Friday is getting all the attention. The market has pulled back on inflation fears ahead of the number. The Fed has attempted to reassure investors that it is going to be restrained in its rate hiking with a modicum of success as the indexes actually have responded somewhat favorably again to better economic data. They are still unconvinced, however, with all of the talk of inflation. It is problematical then whether a strong jobs report will act as the catalyst. The market is set up for the number and it could be the catalyst, but that uncertainty about the Fed and a repeat of 1994 (the last interim rate hikes the Fed embarked upon following a recovery from recession where the market moved laterally for the entire rate hiking process) has the big investors sitting on the sidelines. As such, a strong jobs report won't necessarily make them let go a sigh of relief and open the wallet back up. Moreover, it does not help that it is May, just ahead of the traditionally slow summer months.
Volume was very interesting. We noticed earlier in the week and some last week that NYSE volume was rising as a percentage of NASDAQ volume. Wednesday it was 92% of NASDAQ trade. NASDAQ is home of the 'four letter' stocks, those that are considered the speculative growth stocks. Where there is speculation there is more volume. True NASDAQ counts its trades differently than NYSE, but over time the relationship is the same. When NASDAQ volume starts to fade and NYSE volume rises as a percentage of NASDAQ trade, it is an indication that the more speculative stocks have been sold out, i.e., that the sellers have just about been wrung out of the market. This is not conclusive in itself, but it is an indication that NASDAQ is trying to find bottom here near the 200 day SMA and over the March lows near 1900.
Market Sentiment
Interesting action in conjunction with the volume. The put/call ratio rose sharply even as the market nudged out a gain. There is hedging and speculation the market is going to roll over. The put/call ratio hit 1.0 on the close twice last week and is heading back up even as the market rises. Another two or so sessions over 1.0 on the close shows that a bottom is still trying to form here.
VIX: 15.77; -0.78
VXN: 24.34; -0.8
VXO: 16.23; -0.13
Put/Call Ratio (CBOE): 0.89; +0.22
NASDAQ
Even lower volume as NASDAQ continues the modest bounce higher off the 200 day SMA
Stats: +6.78 points (+0.35%) to close at 1957.26
Volume: 1.594B (-14.6%). Lower below average volume once more as NASDAQ exhibits very little volume vis- -vis NYSE. Hardly the stuff of a strong upside move, showing no accumulation. It will need upside volume to make the double bottom work, and that requires a change in the recent character.
Up Volume: 860M (-366M)
Down Volume: 686M (+108M)
A/D and Hi/Lo: Advancers led 1.19 to 1
Previous Session: Advancers led 1.45 to 1
New Highs: 57 (+1)
New Lows: 39 (-9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq reached toward the 10 day EMA (1973) on the high (1967) once again but gave back 10 points on the close. Volume was considerably lower and could not hold the move and was nowhere near strong enough to break the near resistance beyond the 10 day at 2000 and the 50 day EMA (2001). This is thus far a classic low volume relief bounce in response to heavy selling the prior week, setting up further downside action. The only thing it has going for it at this point is the 200 day SMA and the potential for a double bottom. Maybe all of the nascent secondary indicators will have a cumulative effect that bounces it higher, but it is really in need of a serious character change to make the upside breakout. For now the primary indicators of price and volume are not lending support to that result.
S&P 500/NYSE
Tapped once again at 1125 and the 50 day EMA on the high three times, but with lower, average volume, it could not make the breakthrough.
Stats: +1.98 points (+0.18%) to close at 1121.53
NYSE Volume: 1.465B (-11.86%). Lower though still average volume after a higher volume, modest gain Tuesday. The upside volume did not surpass last week's selling volume, so the upside gain Tuesday was dubious. Still an overall lower volume relief bounce as on NASDAQ. It needs more trade to push it through immediate resistance.
Up Volume: 811M (-223M)
Down Volume: 635M (+30M)
A/D and Hi/Lo: Decliners led 1.01 to 1. Very modes breadth once again even with the mid-caps posting a 0.5% gain.
Previous Session: Advancers led 1.36 to 1
New Highs: 56 (-7)
New Lows: 135 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
For the second session the large caps tapped at 1125 price resistance and the 50 day EMA (1127) and fell back. The same move failed Tuesday on higher volume, so the lower trade Wednesday had little chance of punching the index through that resistance. It made a higher low over the weekly up trendline from the 2003 lows (1112), a positive, but it has been unable to break near resistance and make use of that higher low. Something needs to give it more strength, and we keep looking to the jobs report as the one catalyst. It looks to trade nervously with some downside Thursday before that number given its failure again at the near resistance on the high.
DJ30
Similar action as the blue chips tested higher to the 10 day EMA (10,338), tested lower, then finished flat on next to no volume. Still below the 50 day EMA (10,378), still above some support at 10,250, going nowhere fast. It is trying to hold 10,250 ahead of the jobs report, but it is making lower highs after peaking in February, the most recent when it turned back last week after making a lower high to start April. It is definitely on hold ahead of the jobs report with the look that it will test 10,250ish again Thursday.
Stats: -6.25 points (-0.06%) to close at 10310.95
Volume: 172 million Wednesday versus 208 million Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Q1 productivity and the weekly jobless claims will most likely come and go with little outward appearance that the market cared. Investors are definitely in the gravitational pull of the April jobs report. The Fed has said it will be steady in its approach to removing the accommodative stance, and that has helped investors breath a bit, but it has hardly changed the market from its recent distributional stance.
Indeed, after three modest gains on modest volume the indexes are precariously perched for a fall. They may not roll over Thursday, but a test down to the recent lows is what they are set up for. The real move comes Friday when the jobs report is released. We anticipate a decent month of 200Kish based on the additional anecdotal data we have seen. Then it is up to the market to show whether it is ready to rally on good economic data or just continue its drift as it did in 1994 after a good run and the start of a Fed rate hiking season.
Again we stress that the indexes have given a weak relief bounce in response to high volume selling the week before. That suggests a pullback is ahead, and unless the market likes the jobs data and totally changes its character, that is what the market is telling us. If we get another run at resistance Thursday that stalls, we will be looking at taking some more money off the table, particularly on those stocks that are underperforming and have moved back up to near resistance themselves. As for new positions, we will tread carefully, upside or downside as a major event such as the jobs report has the ability to change the character of the market or really entrench the recent tumble. We could tie up a bundle in putting together some option spreads ahead of the data and make some money or come out flat no matter which way the market goes, but with the market in its current weak state we would just rather see how the jobs data plays out and have plays ready to take advantage of the move either way where we can pick our entry points when we see what as happening as opposed to guessing.
Support and Resistance
NASDAQ: Closed at 1957.26
Resistance: The 10 day EMA (1973) still warrants watching given the lower volume bounce. The April closing low at 1978 itself. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1937) and 50 day EMA (2001). 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 (1937) is still a key point that is trying to hold. Mixed tops and bottoms at 1900. The March low (1896). 1850 below that.
S&P 500: Closed at 1121.53
Resistance: 1118 is the April closing low is still not totally broken. 1125 continues to stall the move. The exponential 50 day MA (1127) and the simple 50 day MA (1129). 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: 1112, the weekly up trendline from the early 2003 lows. 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 (1075).
Dow: Closed at 10,310.95
Resistance: The exponential 50 day MA (10,378) and simple 50 day MA (10,379). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: 10,250 continues trying to hold. 10,000 to 9900-9850. The 200 day SMA (9991). 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): 4.3% actual, 2.4% expected, 1.1% February (revised from 0.3%).
FOMC meeting results (2:15): No change in the fed funds rate, no longer patient but will raise rates in a measured manner.
5-05-04
ISM services, April (10:00): 68.4 actual, 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.
End part 1 of 3
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