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money investment, investment help
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5/11/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: EEFT; OCLR
Trailing stops issued: None issued
Stop alerts issued: IRGI
SUMMARY:
- Market starts rebound attempt but needs more buyside volume.
- SOX, big techs lead rebound but will need help.
- Subscriber Questions
Volume backs off at the wrong time.
The heavy selling and negative market internals and sentiment helped the market stage a rebound. It started after the early Monday sell off and as noted in the Monday report, it was expected to continue Tuesday. A solid early rally took SP500 up to first resistance at 1096, but there it stalled. That seemed to take the wind out of the move. The market faded back and DJ30 even turned negative before an afternoon rally brought stocks back.
SOX, NASDAQ and the small caps (SP600) were leading, the usual stocks that lead when the market makes significant moves, upside or downside. Volume was lacking, however, as stocks could not muster the same upside volume as the suffered during the selling. That is as clear an indication as there is that buyers have not, as of yet, returned to the market with any enthusiasm. The action saw some good movers, but overall it was more of a let up in sellers than an influx of buyers.
That leaves SOX and NASDAQ below the 200 day SMA and SP500 at 1096 as it managed to recover its earlier gains on the close. The action was a relief bounce, a continuation of the Monday reversal, but not with the kind of authority to make you a believer the bottom has been set. Some are saying that is the case, that Monday was the bottom. We are viewing Monday as a possible bottom with the high volume reversal, but it will take a strong volume, big price gain session Thursday through Tuesday to show us that the buyers have really re-entered the market and providing some promise for at least a solid tradable move. Still a lot of worries confront the market in the form of rate hikes, higher oil prices, and an apparent worsening situation in Iraq, but we note that market recoveries are often born out of seemingly desperate times.
THE ECONOMY
No economic data of note today other than the continued speculation regarding when interest rates will be hiked first and how high oil prices are going and when they will impact the consumer.
As for rates, 25 basis points is built into the June meeting according to the FFF contract, but it is most accurate within 2 weeks of the meeting. That is problematical in our view. August seems very likely for a hike, but we still think the Fed wants to see three solid employment reports in close proximity. There is also a misconception running around regarding why the Fed is starting to raise rates. It may be simply a case of misstating a position, but we heard it twice today: the Fed is going to raise rates in order to slow the economy. That is NOT the purpose, at least for now, with respect to the planned rate hikes.
The Fed will raise rates to decrease the monetary stimulus that is currently set to stimulate the economy. In other words, it is backing off the gas as opposed to clamping down on the brakes. That is a huge difference, and that is part of the problem investors are wrestling with right now: is the Fed tapping the brakes or taking the foot off the gas? As we have stated many times, the Fed can raise rates 100 basis points and still be mostly neutral. The rate hikes discussed by the experts, i.e., 50 basis points and then wait and see, would still be accommodative. Thus in no way is the Fed initiating rate hikes to start an immediate slowing of the economy. This seems relatively clear, but it is somehow lost in the daily discussions of the Fed rate hiking campaign, one that has not started yet other than in words.
THE MARKET
A decent bounce with the SOX, the relative strength leader during the selling, continuing its upside move and indeed posting the best day of its 6 day run. Some chips rebounded on strong volume but it was not sector-wide. Techs moved as well but volume was spotty as well. The price moves were fine, just the strength was lacking.
We are calling Monday a potential reversal day though it had its problems as the indexes waffled late, closing off of the highs. Volume was enough and the internals again were bad enough to indicate a reversal in the character. Thus far it is a subtle change of character if the character has indeed changed. That tale will be told over the next week as we see if the market can follow through to the Monday reversal. That means a strong 1.5% or better price gain, rising and above average volume, and breadth in the 2:1 or better range. Plus there needs to be some strong moves by some strong stocks, poised to break higher. That will provide an indication that the big money has returned to feed once again after it stepped in on the Monday reversal.
When you anticipate one of these sessions, you start looking for solid patterns that will provide the leadership. There are stocks scattered throughout the market that have formed solid patterns, many of them on the report. In addition there are the semiconductors, some of which have formed double bottoms similar to the overall SOX index. Many of those stocks still have to clear the middle 'hump' of the 'W' to be considered breakouts. Indeed, SOX has a long way to go to simply get to that level (518.70). Many other stocks have suffered considerable damage as well. In short, even with a good rebound here, most stocks will have to again consolidate in order to move higher. They did this in March 2003 after they jumped off of the second leg of that double bottom. That was an explosive move off the right leg on surging volume. Stocks then moved laterally for 4 weeks before again breaking out and starting the big run.
That takes us back to the volume exhibited this week. The Monday volume was good enough for a reversal session even if the price action was not perfect. The Tuesday volume was not there, however, a sore disappointment if you were looking for a similar response to this consolidation. Instead we have to wait and see if the follow through session later this week or early next week can deliver the strong trade. If not, this rally attempt is in trouble. Indeed, NASDAQ and SOX have to deal with their 200 day SMA soon, maybe even before time for a follow through session. A selling session or reversal on higher volume would not be a good sign.
Market Sentiment
VIX: 18.57; -1.2
VXN: 27.75; -0.16
VXO: 18.49; -1.25
Put/Call Ratio (CBOE): 1.11; -0.17. Continues its very strong reading even as the market bounced. Indicates a lack of confidence in the upside move, a further contrary indicator. That makes 6 readings above 1.0 on the close on the CBOE the past two weeks, but the overall put/call ratio from all exchanges still has not closed above 1 (0.96 on Monday).
NASDAQ
Gapped higher, held the gap as it fought off some midday selling, and rallied to close on the session high. Great price action, but volume was not there to support it.
Stats: +35.28 points (+1.86%) to close at 1931.35
Volume: 1.657B (-13.13%). Pretty lousy volume, not even close to average (1.88B). Certainly not the power you want to see when an index embarks on a recovery.
Up Volume: 1.437B (+958M)
Down Volume: 211M (-1.17B)
A/D and Hi/Lo: Advancers led 2.46 to 1. Solid upside breadth, what you want to see on a follow through session at the end of this week or the beginning of next.
Previous Session: Decliners led 3.51 to 1
New Highs: 22 (+10)
New Lows: 72 (-133)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nice gap and run after the Monday break below the March low (1896) and reversal. As noted, volume was light, and indeed, volume Monday on the reversal was not blowout as it was on NYSE. NASDAQ has been rather quiet volume-wise this month after the hard tumble to end April. A sign of being sold out potentially, but now is the time to show volume as stocks make their way off of the lows. If the big money does not want them at these prices, will they want them any more at higher prices? Well, yes, they do, but it is always good to see a launch off of the lows start with strong trade. It will need it as it approaches the 200 day SMA (1942) and the 10 day EMA (1944).
S&P 500/NYSE
A solid bounce up to first resistance, but it too suffered from light trade.
Stats: +8.33 points (+0.77%) to close at 1095.45
NYSE Volume: 1.53B (-19.98%). Volume remained above average but was significantly lower than Monday's reversal trade. Now that is not necessarily a bad thing; you want to see very strong volume on the reversal, and thus subsequent sessions can show lighter but still strong trade. What it will need to show is that strong volume follow through similar to NASDAQ Thursday to Tuesday.
Up Volume: 1.191B (+915M)
Down Volume: 318M (-1.301B)
A/D and Hi/Lo: Advancers led 3.96 to 1. Very good upside breadth, what we want to see on a follow through session.
Previous Session: Decliners led 8.78 to 1
New Highs: 7 (0)
New Lows: 251 (-609). Easy come, easy go.
The Chart: http://www.investmenthouse.com/cd/^spx.html
Surged quickly to near resistance at 1096 and that turned the index back, sending it close to flat mid-session. It fought the selling and managed to rally late to close right back at that 1096 first resistance. Not a bad start as the volume remained solid and it got a lot of help from small and mid-cap stocks. It will have to show some impressive strength as it recovers in order to clear the layers of resistance (1100-1106, 1125, 1150) and provide a breakout. That is what happens when you dig a hole; its dirty work climbing out as well.
DJ30
Managed to 'rally' back to close over the 200 day SMA (10,010), but it was hardly an impressive move. Indeed, DJ30 had to make a comeback late to avoid a negative session. The industrials continue to struggle as the components cannot get in sync with the market rotation except when they are all selling. Modest rebound attempt; it will need to put the wood to it to help the rest of the market break near resistance.
Stats: +29.45 points (+0.29%) to close at 10019.47
Volume: 224 million Tuesday versus 272 million Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
CSCO, trade balance, and the trade budget top the financial news headlines for Wednesday. CSCO reported results after hours, and while CSCO earnings have sparked rallies in the past, the results, while solid, were not sending stocks higher. CSCO beat by a penny on earnings and by $120 million on revenues. After falling on the news it managed to trade back to flat. Unless something changes overnight it does not appear to be the catalyst to send buyers rushing in with a fistful of dollars or even a few dollars more for that matter. Not surprising as investors, after an early pop on the first earnings, have been unmoved by some solid earnings. Again, the market is looking down the road, not at what it passed or what is just ahead. Fears of interest rate hikes, tougher earnings comparisons, an economic slowdown (tax stimulus abating and higher oil prices), and a lingering stay in Iraq are all being factored into prices.
The main thing we want the market to avoid is further distribution as it heads into the Thursday to Tuesday stretch where we look for a strong follow through session to the Monday reversal. After an attempted rally starts, a day of distribution (heavier volume selling) usually puts the kibosh on the upside and renews the downtrend. We also have to watch how the market reacts as the indexes approach their next resistance points; if volume does not rally with prices we have to be ready for signs of a reversal, i.e., a move through resistance but then fading to close below that support on either sharply higher volume or very low trade. If that is the case we have to assume that the lack of upside volume shows that buyers simply are not ready to step in and that the sellers, after backing off, will reassert their control.
Tuesday provided a decent price bounce and solid NYSE trade. NASDAQ, however, after showing indications it was sold out with its lower volume vis- -vis the NYSE, has to come to the table with some strong upside trade if this market is going to make any headway. If not, it remains in the lateral channel at best. At worst it breaks lower and continues selling. Strong economics continue, but the market is not ready to buy off on them given the other factors that remain unanswered. We remain optimistic for another good upside move, but we also are realistic with respect to the several obstacles to a move higher, and we recall the action in 1994 when the Fed started to hike rates after a good rally to end 1992 that carried on through early 1994: the market moved laterally for almost a year before taking off when the Fed said it was finished. We can make money in that environment, we just have to change tactics. How the market responds the next week will tell more of the tale.
Support and Resistance
NASDAQ: Closed at 1931.35
Resistance: The 200 day MA (1942). The 10 day EMA (1944). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1989) and 50 day EMA (1989). 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.
Support: Mixed tops and bottoms at 1900. The March low (1896). 1850 below that.
S&P 500: Closed at 1095.45
Resistance: 1096 to 1100. 1106 is a May 2002 top and represents some early 2001 lows. 1112, the weekly up trendline from the early 2003 lows. 1118 is the April closing low and the 10 day EMA (1109). 1125 stalled the last bounce attempt. The exponential 50 day MA (1123) and the simple 50 day MA (1125). 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: March low (1087). 1075 to 1070 from the December consolidation. The 200 day SMA (1077).
Dow: Closed at 10,019.47
Resistance: The 10 day EMA (10,192). The 18 day EMA (10258) and 10,250. The exponential 50 day MA (10,335) and simple 50 day MA (10,337). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: 10,000 and the 200 day SMA (10,009). 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
5-12-04
Trade balance, March (8:30): -43.0B expected, -$42.1B February.
Treasury budget, April (2:00): $15.5B expected, $51.1B March.
5-13-04
PPI, April (8:30): 0.3% expected, 0.5% March.
Core PPI: 0.2% expected, 0.2% March
Initial jobless claims (8:30): 325K expected, 315K prior.
Retail sales, April (8:30): -0.2% expected, 1.8% March.
Retail sales ex-auto (8:30): -0.2% expected, 1.7% March.
5-14-04
Business inventories, March (8:30): 0.4% expected, 0.7% February.
CPI, April (8:30): 0.3% expected, 0.5% March.
Core CPI (8:30): 0.2% expected, 0.4% March.
Industrial production, April (9:15): 0.5% expected, -0.2% March.
Capacity utilization, April (9:15): 76.7% expected, 76.5% March.
Michigan sentiment, preliminary (9:45): 96.0 expected, 94.2 prior.
SUBSCRIBER QUESTION
Q: You mentioned the other day how the interest rate hike could pale in comparison to tightening of the money supply. How is the money supply right now and where do you see it going with interest rates, inflation, and the national debt? Is it worth commenting about on a regular basis?
A: Great question. All of the attention regarding the Fed focuses on the level it keeps the Fed Funds Rate and the discount rate. That is just part of the picture. The Fed does not control the economy, the market, the budget or anything like that. Its mandate is to keep prices relatively stable (i.e., avoid high inflation or deflation), and it does this by controlling the money supply. One way to control the money supply is through the raising and lowering of short term interest rates, thereby making money more or less expensive. It can also enter the treasury market and buy or sell treasuries. It has many ways to impact money supply.
Back in 1999 it pumped up the money supply and then drained the pool in 2000. Even when it started lowering rates, however, it did not refill the pool. It opened the locked gate to the pool, but there wasn't any water in it. Until the Fed jumped overall money supply was there real monetary stimulus. It was as if the Fed was seeing if lower rates would get businesses to bite; it did not so it needed more drastic measures. Unfortunately we had to wait over a year before the Fed realized this and started putting water back in money supply. You can see money supply spike in late 2001 and early 2002 as the Fed finally made the money available. During 2002 it started to tighten the supply. Ever since it has been on a steady decline, falling below the average level in late 2002. It really tanked in the last part of 2003, something we noted at the time, and it has not risen since. Thus even without raising rates, the Fed has slowed things down by removing water from the pool. You can still get in and swim for cheap even if there is not as much water because the Fed is holding the rates down artificially. There is just not as much to go around so not as many can participate. So, even though the Fed Funds Rate is still at 1%, there is not as much money available, so the Fed has already taken the foot off the gas pedal without touching rates. Note also that the market has suffered as well since the level of the pool was lowered.
End part 1 of 3
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