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world stock market, us stock market
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5/13/04 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full reports issue Monday, Wednesday and Saturday. Tuesday and Thursday a market summary and some solid plays for the next session are included.
MARKET ALERTS
Targets hit alerts issued Thursday: None issued
Buy alerts issued: ASKJ; PSYS
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:
- Quiet day of rest after Wednesday reversal.
- Producer prices rise, add to fear of inflation
- Is market responding to short term worries or forecasting economic slowdown?
After all the excitement, a quiet session.
The market did basically what it needed to do, taking a breather on low volume and holding onto most of its Wednesday reversal. It was a very lazy day, but given the recent propensity to follow gains with sharp selling attempts, a nice, lazy session was just fine. Indeed, if the market can close out the week with another slow session where it holds its gains on light trade, all the better. That sets up a follow through session Monday through Thursday next week where a high volume, strong price gain sets the stage for a recovery off of the lows of the base.
Given the news of higher producer prices fanning the inflation fears and falling (though expected) retail sales coupled with increasing oil prices, the ability to hang onto gains in a leisurely session was not bad action. Friday the market gets another big dose of data including the consumer price index to digest along with after hours earnings from Dell and ADI. Dell results were in line, and that was not enough for the street as Dell and other PC-dependant stocks were trading lower. ADI in the chip sector, however, beat the street and had very positive guidance. It sparked a very nice after hours rally in semiconductors, one of the sectors that lagged on the Wednesday reversal and lagged again Thursday. If the chips join in, that is a big plus for the market holding the reversal and putting together a follow through next week.
THE ECONOMY
April Producer Prices climb, gets the inflation tongues wagging on the tube.
The PPI rose 0.7% overall, the highest since March of 2003 (a 1.3% rise). That was stated with a certain ominous tone by several financial station commentators. Gee, that was just before the market kicked off its big 2003 run. The big part of the gain was a 1.6% in energy and 3.4% in gasoline. That put the core at 0.2%, right in line with expectations and matching the March gain.
Is this the inflation bell ringing? The twice as strong rise in March 2003 was a glad sign given fears of deflation. This 0.7% 'surge' is not as dire as the sounds from the television would lead you to believe. Still year over year prices rose 3.7%. Core prices were up 1.5% year over year, the largest gain since August 2001. These comparisons are thrown out as if they stand on their own. The context makes the difference. In August 2001 we were in a recession. The year over year gains reported Thursday match recessionary numbers. Yes prices are rising; they should rise because we are in a recovery. It was less than a year ago tongues were still wagging daily about deflation. The Fed kept deflation concerns a high priority in its statements (though the Fed labeled it 'the lack of inflation') until just recently. This market is so gun-shy after the long downtrend that any, any change is dissected on the subatomic level as analysts continue to exercise self flagellation as penance for 1999 and 2000.
It is all in the context.
In our seminars we frequently discuss where a stock is in its life cycle. This is not a rehash of the circle of life from 'Lion King' but an important understanding of what you can expect from a stock in its trend. Is it at the beginning of a trend with several breakouts and runs ahead of it or is it on the tail end of a nice trend and in need of a sabbatical? You have to look at the economic numbers in the same way.
The economy was dead for three years as far as capital investment, i.e., business activity and investing for the future economic growth. Money was in housing and REITS because that return was better than the business arena. The economy has just awakened. It has not seen any of the benefits to be derived from the investment already made and to be made as the recovery continues. Even with all of the technology investment in 1999, most companies did not start seeing the benefits until recently as seen by the huge growth in productivity as that technology was put to work as the recovery started. Thus pressure to raise wages has been lower, and companies have been able to absorb rising commodity costs.
Flash back to 1993 and 1994. The US had emerged from a pretty shallow recession though some had ridiculously styled it as the worst since the Great Depression and even more had bought into that hype. What happens when recessions end in the world's largest economy? Prices start to rise both in commodities and in finished goods. Energy prices were, surprise, rising as well. The Fed panicked, started raising interest rates in 25 basis point increments, got impatient because nothing happened (does it ever until the cycle crashes?), and then started jacking up rates 50 basis points at a time. In a grand finale, it fired a 75 basis point cannonball into the economy. It almost through the US right back into recession. This scenario has played out just about every time the Fed raises rates (remember the final 50 basis point kicker in 2000 after the economy had already turned lower?), and that is what has the market so scared this time.
The Fed raised interest rates to cool the growth, but prices did not fall, particularly energy prices. Why? Because while there are some market forces at work with respect to energy, much of the market is still controlled by a cartel. Raising rates won't cause the cartel to lower prices (i.e., produce more) and it won't cause energy prices to fall via market forces unless the market basically crashes. The key factor to take away: energy prices were higher and remained high despite rate hikes, but those higher producer prices were NOT passed on to the consumer. The CPI remained tame.
Right now there is modest wage growth and tremendous productivity. Everyone assumes that prices will be passed along. Yes there will be price increases, but will they reflect anything other than normal re-inflation after deflation fears? The last time there was detrimental inflation was in the 1970's. We do not buy the argument that the Fed has successfully fought off inflation since. It has more to do with the fundamental changes in the US economy that occurred in the 1980's after the horrific 1970's gutted business. The technological innovations spawned by the growth oriented, free market policies reintroduced to the US economy in the 1980's created an environment that allowed supply to meet demand and thus thwarted inflation before it had the chance to take hold whenever the economy really cranked up. As long as we can remember to allow the markets to work and remember history and how the country bought into the controlled market philosophy of the late 1960's and 1970's and what that did to unemployment and interest rates, then we should be okay. Every economist and citizen should be required to read about all of the programs and policies and regulations created during that time and compare them to the rate of GDP, inflation, interest rates, unemployment, etc. It would be a good reminder each time we start to say 'there ought to be a law . . .'
Retail sales fall 0.5% after a huge March.
Auto sales and clothing led the decline, and though it was more than expected, it was still in the ball park. Take out autos and it was down 0.1%, better than the -0.2% expected. March was revised higher to 2% from 1.8%, so all in all it was a wash. Excluding autos, sales were up a whopping 9.4% over April 2003, and, excuse the comparison, the biggest gain since March 2000 just as the US economy crested. That shows how strong this recovery is.
Worried about April? The 1% gain in February, the 2% gain in March will be followed by a pickup in sales this month even as gas prices rise. Chain store sales through May 8 are 2.2% higher this month than in the same period in April, and are up 5.8% from this time last year. The consumer is continuing to consume, and importantly, so is the business side of the economy as that equipment purchased in 1999 is being replaced after its 3 year cycle.
THE MARKET
A nice quiet session after a second intraday reversal for the week from selling to buying. This is in the heels of some rather volatile action starting in March. March saw the first bottom in the correction with stocks starting that leg lower on some higher volume, i.e., distribution. A low volume rally back into April, then some more volume selling started the next leg lower. It tried to recover on rising volume (accumulation) but then turned right back to distribution as it tanked toward the second low. Then this week more hard selling but then same day reversals on volume.
If you look at the market day to day you could get twisted in a knot. For example, Wednesday the gloom was just about has thick as it has been in any harsh downtrend. Listening to the financial stations was amazing. Some of our traders had to physically get up and get away from the tube to get a better perspective. Sound familiar? The old 'count to 10 before you say anything' idea.
Two points to consider. First, the indexes are still within overall relative modest corrections with NASDAQ leading among the large indexes with roughly a 10% correction. It and the other indexes are trying to scratch out a double bottom. The pattern is holding, but the wild action makes anyone wonder if they will make. Overall, however, the economy looks good for the future and the market is holding onto its pattern in a modest correction after a strong run in 2003. It needs the rest before it continues, particularly with all of the near term issues such as the war and related distractions, the Fed's indication it will raise rates, rising oil prices, fear of inflation.
Second, even though the market is still contained within its correction base the action has become quite volatile as noted above. This volatility is reminiscent of early 2000 when the market peaked in that bull run. There were many sessions where there were downside losses on high volume followed by strong upside gains on high volume as it peaked and then rolled down into the first correction. That volatility continued, moved into a summer rally, but then double topped in September and the jig was up.
The market then was forecasting the economic slowdown that started showing perceptible signs in March and April (we know because we were reporting them). Stocks had surged in a dramatic run, fueled by the exploding money supply the Fed released in 1999. They were overpriced and unable to withstand any thought of a future slowdown in earnings. Is the market doing the same now?
The pundits are split as to whether this is a new secular bull or a cyclical bull move within a secular bear market. Unlike 2000, we are emerging from a recession, not at the peak of an 8 year economic run. Again, think about the life cycle of stocks and the economy. Still, will earnings be able to grow at the same pace as in 2003 and early 2004? Comparisons will be harder as results improved from the recession and options will be expensed. It all depends upon the strength of the growth, and the question remains whether the market is forecasting a slowdown similar to 2000.
Right now we do not think it is. The correction in stocks has been 10% on NASDAQ. In 2000 the first leg took it down 40% where it double bottomed and gave a nice summer rally. If this current pattern holds and stocks recover, it will be a quite typical correction in an ongoing rally tied to an economic expansion. Thus the market action to this point does not appear to indicate a nefarious economic drop ahead but more reflects the concerns regarding the near term worries of the war, the handover, inflation, the election, energy prices, the Fed rate hikes. Any of those could morph into something worse, but again, the market with a 10% or less correction is not showing that at this juncture.
Maybe it rallies from here and provides a summer rally and then a meltdown, but that remains to be seen. There is a lot of speculation about market what all of the various undercurrents in the world and economy mean right now, but none of the pundits know for certain. The market is speaking, and right now it is saying it is concerned about the these events as it takes a breather from its 2003 run. It has not pitched in the towel yet, and it has not said it is ready to continue its run higher. That leaves us watching next week and what the big buyers do with this reversal that has made two attempts to get started this week.
Market Sentiment
VIX: 18.86; +0.72
VXN: 28.11; +0.49
VXO: 19.39; +0.9
Put/Call Ratio (CBOE): 1.01; -0.11. Eight closes over 1.0 in just over two weeks. The overall put/call ration rose to 0.97 Wednesday in that reversal. That puts together a string of three session right at the 1.0 level overall. There is a massive amount of hedging ongoing in the QQQ, SPX and other index options. Whether hedging or speculation, the result is the same: fear of the downside sparks a lot of put buying that is, historically, a contrary indicator.
NASDAQ
Volatile, low volume session that managed the slightest gain, but was the slow session expected after the big reversal.
Stats: +0.44 points (+0.02%) to close at 1926.03
Volume: 1.559B (-17.63%). Extremely low trade. Some call this a lack of follow through or cast other disparagements on the action, and they may be right. The real import is that it holds up on slow trade and then gives a high volume upside move next week.
Up Volume: 799M (+121M)
Down Volume: 746M (-385M). A standoff.
A/D and Hi/Lo: Decliners led 1.3 to 1
Previous Session: Decliners led 1.22 to 1
New Highs: 24 (+3)
New Lows: 48 (-52)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tapped the 10 day EMA (1938) on the high, traded negative on the low, finished flat. Volume was very low after an above average volume reversal Wednesday. It is okay for it to gather itself here, but you don't want to see too much backsliding before it takes on the 200 day SMA (1944) and the 50 day EMA (1985) as starters in trying to rebound and complete the right leg of the double bottom it is trying to form.
SOX continues to lag, struggling below the 18 day EMA after lagging on the rebound Wednesday. It has not given back too much of the modest rally off the May low (433), but it needs to take on some leadership again. The ADI earnings after the close had chips jumping despite the perceived disappointment with the Dell results.
S&P 500/NYSE
Same slow action on lower volume, holding onto the reversal but nothing more.
Stats: -0.84 points (-0.08%) to close at 1096.44
NYSE Volume: 1.408B (-17.04%). After a strong volume reversal Wednesday volume fell below average as the index went up, went down, closed flat.
Up Volume: 658M (-193M)
Down Volume: 739M (-68M)
A/D and Hi/Lo: Decliners led 1.13 to 1. Flat just like the action.
Previous Session: Advancers led 1.09 to 1
New Highs: 16 (+8)
New Lows: 151 (-57)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped toward the 10 day EMA (1104.73) on the high (1102.77) but was up and down all session before closing down fractionally. Low volume was just what it needed, particularly given the action. The candlestick pattern shows a doji, and that can suggest a change in direction, but since it does not come at the end of a run either up or down its meaning is limited. It remains trying to hold the 200 day SMA (1078) as it sets to complete the right leg of its potential double bottom. Still has that immediate resistance to tackle (1100-1106, 1125), but if the buyers are there, they will take them out just as the index took out the support on the fall.
DJ30
Held roughly at the 200 day SMA (10,017), giving back some of the Wednesday reversal. Volume was lower as well as the blue chips, similar to the other indexes, took a day off to regroup before trying to recover from the selling and the whipsaw reversal Wednesday.
Stats: -34.42 points (-0.34%) to close at 10010.74
Volume: 216 million Thursday versus 246 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
More pre-market economic data to chew on with the CPI (consumer price index) getting the most attention as investors want to try and quantify what a 'measured' approach to rate hikes will mean and see if there are producer prices being passed along to consumers. Inventories, production and capacity, and the nearly worthless preliminary Michigan sentiment report. In addition, the Dell and ADI earnings will have their impact.
Again we would like to see the market escape the week without giving much more back of the Wednesday reversal to allow it to set up and try to provide a follow through next week. At this stage in the correction the questions about whether this is just a correction before a further rally, a 1994-like lateral move until the Fed is finished, or the resumption of the bear market are simply not answered. The economic data all suggest the economy continues to expand faster than anticipated, but the wild card is the Fed, rolling around like a loose cannon with a load of cannonballs to shoot. It promises not to use many and at that only the small ones, but similar to the carnival barker, the credibility just isn't there.
Nearer term, the June 30 handover is the main event. The closer it gets without any major upheaval, the better chance of the market making more meaningful advances. As with the start of the war, once it was clear to the market that the war was going to occur, investors started buying as the uncertainty that held the market back ahead of the war was over. Remove the uncertainty regarding the handover, and that will be one less worry for the market.
Support and Resistance
NASDAQ: Closed at 1926.03
Resistance: The 200 day MA (1943). The 18 day EMA (1956). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1985) and 50 day EMA (1985). 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 1096.44
Resistance: 1096 to 1100. 1106 is a May 2002 top and represents some early 2001 lows. The 10 day EMA (1105). 1113, the weekly up trendline from the early 2003 lows and the 18 day EMA (1112). 1125 stalled the last bounce attempt. The exponential 50 day MA (1121) and the simple 50 day MA (1123). 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 10,010.74
Resistance: The 10 day EMA (10,137). The 18 day EMA (10,213) and 10,250. The exponential 50 day MA (10,312) and simple 50 day MA (10,315). 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 (10,0017). 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
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 2
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