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world stock market, us stock market
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5/12/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: HLEX; GNSC; EMIS
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Furious rally after SP500 re-tests 200 day SMA
- Cisco hiring as gas prices reduce Carmax' outlook.
- Wednesday reversal much stronger than Monday.
Another big reversal.
At the time we noted the Monday reversal had its warts, but you have to live with what the market gives, and that was all it was giving. Early Wednesday that reversal and the weak Tuesday bounce were dead as the indexes had undercut the Monday lows. The gloom was just about as dismal as it has been, helped by the continuing string of near term troubles exacerbated by the despicable acts aired on Tuesday. We felt the gloom and it was contagious. Listening to the floor traders, the financial stations, and several brokers it was not a far step to conclude that the bear market had resumed after a cyclical bull market (a bull market within a longer term bear market). After all the timeframe for the life of such a bull market is getting close, and the action has certainly been distributive on the way down.
We kept watching the SP500 200 day SMA, using that as our litmus test for the market. that level had held Monday, and if it was undercut and failed an intraday test, the outlook for stocks did not look good, at least to the upside. It took a conscious effort to fight the gloom mongering that always accompanies sell offs and focus on the key market elements. DJ30 had collapsed and looked gut shot. NASDAQ was trying to hold at the Monday lows. SOX was in full retreat after that 6 day climb. We decided the SP500 was the key once more; as long as it held or recovered on a test of any breach we would not succumb to the downbeat market.
In the early afternoon the SP500 had slumped again after a bounce attempt, just as it had done all session, and that drop carried it through its 200 day SMA. It bounced to test the move, and just about then Barton Biggs was speaking on CNBC. He noted that the market was as oversold as he had seen in 20 years and that a violent oversold rally could start anytime over the next couple of days. After being very negative during the bear market, Biggs has been pretty much dead on in calling the rally off the 2002 lows and other moves.
The breath had barely dissipated when the market started the afternoon reversal. NASDAQ recovered 42 points from the low, SP500 21 points, DJ30 193 points. DJ30, SP500 and SP600 turned positive with NASDAQ just missing a positive close. All indexes rallied to the close. Volume was stronger. All in all it was a much better reversal than Monday. Now we will see if stocks can hold it together for a few sessions and then deliver a real follow through session. You have to admire the second comeback in three sessions. It still, however, has to prove if there is any gas left in the tank after the reversal.
THE ECONOMY
Trade balance deficit jumps 9%.
The trade balance again was negative, and more so than anticipated. With the rest of the downbeat attitude in the market, that brought out more discussions of how that would ultimately impact the dollar and investment in the US, causing carnage at some point down the road. Problem is, no one knows what that point is and it has been fretted over for decades.
The one measurable deleterious impact it has notably caused is that foreign economies have grown reliant upon the US consumer. When the US economy is strong, the US consumes domestic and foreign goods. Lots of them. During the past 20 years as the US economy has remained the strongest while many if not most other economies suffered, those economies survived by manufacturing and shipping goods to the US for consumption. That has made the world overly dependent upon the US economy. When the European nations smugly reacted to the US entering its recession in 2000 (when the stock market crashed), they were foolishly deluding themselves that they could thrive without the US. Their economies tanked shortly after the US when all of the sudden there was not enough demand for their products.
The expansion of the Chinese economy is one of the better things for the world economy despite driving up commodities prices. It takes the focus off of the US as the leader and can allow development in other economies.
Cisco sees US demand increasing, starts hiring.
CSCO noted in its conference call that it saw US demand substantially increasing for the first time in four years. The economic data have shown us that demand for computers and electronics among businesses started to grow in late 2002. Remember when we said that business executives were going to be overly cautious in claiming any recovery? That has been the case and clearly was with Cisco where Chambers admitted Tuesday that his company had been overly cautious in its recognition of the recovery. The increase in US demand is good enough to warrant CSCO starting to hire 1,000 employees this quarter.
Oil prices starting to have their impact.
Oil hit $41/bbl Wednesday as fears about Iraq and the Middle East continued to add to demand pressures. The US keeps adding to the SPR even as prices rise, and that in itself has resulted in speculation that perhaps something major is anticipated in the Middle East. Crude supplies on hand were up, but gasoline stocks were lower, and that helped drive prices as well. Oil is in a perfect storm right now driven by actual demand, speculation about higher prices, and fear of supply interruption. For the time being there is nothing to break the cycle as even Saudi Arabia's suggestion to increase output by 1.5 million bbl/day had no impact.
It is starting to have its impact. Carmax (KMX), a nationwide auto retailer, Wednesday cut its sales forecast based on higher gas prices impacting decisions to buy. The stock was already in a nasty downtrend, and the news still gapped it sharply lower. If oil continues at this level for 2 to 3 more months, then the economy is at risk. Nine of the ten last recessions have been preceded by a sustained spike in energy prices. The strength in the recovery and improvement in the job and wage picture has thus far enabled consumers and businesses to consume. The longer prices remain high and continue to their rise, however, they will start to erode economic gains.
THE MARKET
SOX: did not really participate
As noted, the Wednesday recovery was of better quality than Monday. Monday volume was stronger, but the indexes sagged from the rebound in the last hour. Wednesday volume was up on NASDAQ and NYSE after a rather weak gain Tuesday. It was not huge volume but NASDAQ approached Monday's level as it reversed off the Monday low. All indexes rallied through the close, and we had word from floor traders that their longer term clients were putting in some big orders (as opposed to hedge funds).
This was the second big reversal in three sessions. After a pause in the selling Tuesday, the sellers were right back in the action Wednesday, pummeling stocks. Again, however, the market roared back when the SP500 held the 200 day SMA. Once more shorts were run over and had to cover. This repeated rather ferocious rallying will have its impact. After such a strong rebound the market may open soft or after a pop higher soften. Shorts won't be as eager to sell, however, but will most likely use weakness as an opportunity to cover, i.e., buy back the shares they sold. That has the effect of propping up the market if not resulting in another rally.
This action most likely will give the market an opportunity to actually set up for a follow through session Monday through Thursday next week. A follow through is a strong price gain of 1.5% to 2% on rising, preferably above average volume, and it comes several days after the rally attempt starts. It shows that the big money, after an initial foray into the market, has come back and is buying stocks once again.
We still have to keep in mind, however, that one of the factors restraining the market is the Iraq handover in June 30. We have been warned by the President and others that the level of violence will increase as that date approaches. With at least three terror groups from outside Iraq now operating there and some Iraqi resistance as well, anything can happen before that date. It appears that will keep any upside move somewhat restrained.
Looking at the index patterns and the work they need to even approach a breakout, that June 30 date is not that far off. In other words, the indexes are coming off the lows and have to rebuild patterns into positions to make a breakout move. The Wednesday reversal could be the start of the rebuilding process, and when the June 30 deadline approaches and if the violence has not increased, then the market could greet the removal of one of the uncertainties holding it back with a solid break higher. That remains to be seen, but in past crises or uncertainties, the market bottoms in what seem the most dismal times, rebuilds, and then breaks out when it appears certainty is at hand even if the actual date or event is not met. In other words the market anticipates the better news, prepares for it, and then makes its move ahead of the news.
The indexes will still have to deal with the 200 day SMA (NASDAQ, SOX) and other resistance, and they will have to show much better price/volume action to indicate that selling has abated and that accumulation has resumed. Those are part of the rebuilding process, however, and it will make the transition or it will fail and resume the distribution selling.
Market Sentiment
VIX: 18.14; -0.43
VXN: 27.62; -0.13
VXO: 18.49; 0
Put/Call Ratio (CBOE): 1.12; +0.01. Another close over 1.0 even with the reversal, its seventh in the past two weeks. The overall put/call ratio from all exchanges has hit 0.96 and 0.95 Monday and Tuesday, showing a high level of downside bets being placed. It continues to be a contrary indicator to the selling or further selling.
NASDAQ
Sold hard, slightly undercut the Monday low, and then rebounded furiously, just missing closing positive on surging volume.
Stats: -5.76 points (-0.3%) to close at 1925.59
Volume: 1.892B (+14.23%). Volume jumped smartly as NASDAQ reversed off a fresh low. Volume again returned to above average similar to Monday, and it looks like a reversal that will provide some more upside on this move.
Up Volume: 678M (-759M)
Down Volume: 1.131B (+920M)
A/D and Hi/Lo: Decliners led 1.22 to 1. Was -4:1 at one point.
Previous Session: Advancers led 2.46 to 1
New Highs: 21 (-1)
New Lows: 100 (+28)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was in a freefall early, but after 1.5 hours where each weak bounce was swamped with selling, the descent eased and NASDAQ tried to turn to a more lateral move. After tapping the Monday low (1880.32) it did turn to a lateral move, sold and undercut the low (1878.77) and that coincided with the SP500 retesting the 200 day SMA. From there it began a sharp rebound recovering 42 points off the low and just missing a turn positive. It remains below the 200 day SMA (1943) and the 50 day EMA (1987) ahead. These rebounds can be explosive or can wander higher. We would prefer an explosive move through 2000 and then a lateral move for a few weeks to consolidate and set up the next move. Sound familiar? That is what the market did in early 2003.
SOX was notably lagging. After leading with its 6 day mini rally it was selling as hard as the rest of the market. It reversed as well, coming off of a 22 point drubbing and cutting its loss to 8.25 points. It closed on its rebound high, but it lost 1.8% on the session, much worse than the other indexes. The market needs SOX to participate in any move. Perhaps it needed more of a breather after six up sessions.
S&P 500/NYSE
Undercut the 200 day SMA, but that set off another wave of buying and drove the large caps to a positive close on rising volume. Nice reversal session.
Stats: +1.83 points (+0.17%) to close at 1097.28
NYSE Volume: 1.697B (+10.93%). Excellent volume on the reversal. Though less than Monday volume it was still a very solid session, topping the recent selling volume.
Up Volume: 851M (-340M)
Down Volume: 807M (+489M)
A/D and Hi/Lo: Advancers led 1.09 to 1. Turned around a pretty ugly downside session.
Previous Session: Advancers led 3.96 to 1
New Highs: 8 (+1)
New Lows: 208 (-43)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Slightly undercut the 200 day SMA (1078.21) on the low (1076.32) and that set off another rebound. This one carried it through the 1087 resistance that stalled the Monday move. As with the other indexes it still has plenty of resistance (1100-1106, 1125), but the second strong reversal off the 200 day SMA indicates it is ready to try a further upside move to test that resistance.
DJ30
At one point the Dow was getting hammered and we noted it had collapsed below the 200 day SMA (10,013) and the Monday low (9932) even as SP500 was attempting to hold its 200 day SMA. Its intraday pattern showed the same double bottom and explosion off of that level. As with SP500, it rallied positive and closed right on its high. The move carried it back over the 200 day on the close as volume spiked. It is also showing the same double bottom pattern on the daily pattern as SP500 and NASDAQ are showing.
Stats: +25.69 points (+0.26%) to close at 10045.16
Volume: 246 million Wednesday versus 224 million Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data starts to roll again Thursday with retail sales, jobless claims, and hopefully, the PPI. The market will have some economic data to look at other than just the continued geopolitical, domestic political, interest rate and energy problems. Of course, the market has not paid much attention to economic data other than to worry about how its strength was going to impact Fed actions. With Fed governors out again talking about how the Fed would act slowly and with restraint, perhaps the worries will finally subside some.
In any event the market often follow such a rush higher with some weakness. It could be on the open or after a continued move upside early. The key is if after that softness the market can start building again. That depends upon if the shorts use the weakness to close positions. As noted, after getting thumped by two reversal sessions in three, they will be using opportunities to close positions as opposed to opening new ones. That is what helps trigger the continued move higher. Sometimes it takes a session or two, sometimes it starts right away.
Best action would be taking a session or two off on lower trade and modest losses or gains (basically holding steady) and then breaking higher on sharp volume. That is the best case scenario, and the second strong reversal this week bodes well for continued upside. We still have to be vigilant for a resumption of selling; the market looked as if it was doing so and on strong trade. If it turns immediately and starts to sell again on volume, very bad. This is where the market has to set its bottom and start rebuilding for another breakout to come down the road.
Support and Resistance
NASDAQ: Closed at 1925.59
Resistance: The 200 day MA (1942.41). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1987) and 50 day EMA (1987). 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 April lows (1880, 1878). 1850 below that.
S&P 500: Closed at 1097.26
Resistance: 1096 to 1100. 1106 is a May 2002 top and represents some early 2001 lows. The 10 day EMA (1106). 1112, the weekly up trendline from the early 2003 lows and the 18 day EMA (1113). 1125 stalled the last bounce attempt. The exponential 50 day MA (1122) and the simple 50 day MA (1124). 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: April lows (1079, 1076). The 200 day SMA (1078). 1075 to 1070 from the December consolidation.
Dow: Closed at 10,045.16
Resistance: The 10 day EMA (10,166). The 18 day EMA (10,237) and 10,250. The exponential 50 day MA (10,324) and simple 50 day MA (10,326). 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 (10,0013). 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): -$46.0B actual, -$43.0B expected, -$42.1B February.
Treasury budget, April (2:00): $17.6B actual, $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.
End part 1 of 3
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world stock market
us stock market
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