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us stock market, trend trading stock
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6/01/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: BLUD
Buy alerts issued: IMCL; CHIC; WBSN
Trailing stops issued: None issued
Stop alerts issued: None issued
SUMMARY:
- Nice recovery as market faces higher oil prices with relative calm.
- National manufacturing levels hitting 20 and 30 year highs, business construction surges.
- Market shows good intraday action as indexes form handles to their bases.
- Subscriber Questions
Stocks shake off higher prices, manage to close positive.
After lower oil prices helped stocks advance last week, spiking prices Tuesday threatened to undo the gains. Oil jumped back, closing at $42.32/bbl after the second attack on Saudi Arabian oil compounds in the past month. We voiced this as one of our main concerns regarding terrorism: with the US relatively hardened compared to other targets, the oil suppliers to the US become an obvious target. With Saudi Arabia loudly proclaiming it was going to do what was necessary to produce more oil, the target for the terrorists became clearer.
It was not the worst case scenario for such an attack though the loss of life based on the attack is deplorable. Also concerning was the ability of three of the terrorists to escape when they were supposedly surrounded, cordoned off on a specific floor of a building. This 'escape' raises questions as to whether some are still willing to look the other way with respect to seriously working to apprehend the terrorists. In any event, the attack on the compound was not the same as a bomb blast or other damaging act taken with respect to various production facilities that would cut into or cut off supply. The effects of that would be catastrophic for the economy.
Stocks traded sluggishly all morning, but did not sell off sharply. Indeed, the selling was limited to NASDAQ and SP500 testing their 50 day MA. That triggered a smart rebound in the afternoon on some rising trade. The smaller caps held up until the rest of the market reversed; then they all advanced to positive territory on the close other than SOX. Volume was up but still quite low; there were some good volume moves, but they were not widespread. The session did not change the market's character, but the intraday action was solid and the market avoided a sell off on bad news. The early summer rally that started looks as if it wants to continue even with the news putting further pressure on stocks.
THE ECONOMY
National manufacturing matches, yeah verily, surpasses Chicago results.
Chicago was a portent for the national ISM, but it was just the warm up act. While Chicago showed 16 year highs, the national number showed growth rates not seen in 20 and 30 years. New orders hit a 20 year high. Unfortunately, prices paid hit a 20 year high as well. Still, the positives of the report outweigh any negatives. Employment, for example, hit a 30 year high (61.9). For an economic sector that has been in a 50 year secular decline these are super growth indications.
The arguments that the economy is performing poorly are growing quite thin. First it was the lack of jobs. When jobs started to grow it became the lack of quality jobs. When it was apparent that incomes were surging as the jobs were not just burger flipping, it became the lack of manufacturing jobs. Now that manufacturing jobs are surging the focus will shift once more, probably to deficits, how oil prices will end society as we know it, or how the Iraq war will be too much of a drain as much needed funds are diverted from the economy. Of course the federal government itself bleeds billions from the economy each year through duplication, waste and outright fraud. Never mind that the deficit projections have been cut by over $100B in the preliminary revisions based on the economic growth and that future revisions will see the deficit tank further. Never mind that you cannot tax your way to prosperity as the deficit mongers would have you believe. Personally, most Americans would prefer an economy growing at 5+% where you had to run some deficits than raise taxes and have a stagnant to declining economy and, oh yes, deficits due to the economy being unable to generate enough tax revenues to pay for all of the important federal spending such as the rock and roll hall of fame, cowgirl hall of fame, etc.
Construction spending surges past expectations, March revised sharply higher.
Construction surged 1.3% versus 0.4% expected. March was revised to 2.4% from 1.5%. Key to this was not the residential construction or public construction but the private nonresidential building which posted its third consecutive gain, coming in at $219B, the highest since March 2003. Construction spending has surprised to the upside the past two months as the economists are looking at the residential housing market only and not the underlying strength of the economy. The residential housing market is an early cycle sector. You have to look at the rest of the economy to figure out where construction is going. Economic activity on the supply side or business side continues to accelerate, and that means building projects that often take months if not years to plan are just getting cranked up. That bodes well for continued construction activity even if the housing market continues to cool.
THE MARKET
The soft open on the heels of the Saudi attack and the lower foreign markets gave way to an afternoon rebound off of near support at the 50 day MA. Once again the small and mid-caps held their ground in the early selling, remaining positive and leaving the door open for an advance. Maybe it has to do with the Russell rebalancing to come or simply that money managers are moving back into these stocks after swearing that large caps were going to lead from here on, but nonetheless the smaller caps were outperforming and helped pave the way for an afternoon rebound.
The move pushed stocks modestly positive on slightly higher though still quite tame volume. Again, no change in character, but the move that started two weeks back remains intact with a successful test of the 50 day MA triggering the late rebound. It was not a huge break higher, and again, that volume would not have supported a big price move. What the indexes have done the past three sessions is basically move laterally after the solid surge up off the mid-May lows. Indeed, it looks as if the SP500 and NASDAQ (SPY and QQQ as well) are in the early stages of handles to their double bottom patterns. A handle is simply another name for a lateral consolidation where the more eager sellers are shaken out as the upward move appears to be losing momentum. Fearing another fall they go ahead and sell out. If volume remains lower overall that shows there are fewer sellers than buyers even if the index finishes lower. Once they are gone the market is free to advance without those sellers ready to get out at the drop of a hat. More committed owners means the market can make a more sustained move before needing the next breather.
This is pretty good looking action as it allows the market to take a breather after a good move up off the May lows, allows stocks to further work on their bases, and sets up the next stronger move higher. As of yet this move has not shown blowout volume, but we need to put it into perspective. This looks like an early summer rally, and the volume simply may not be there as you would see at other times in the market. That of course often means summer rallies don't carry through the entire summer season, instead fading and then setting up a bottom in the early fall. There is some evidence that election year rallies tend to carry right on through the summer, but with all of the additional baggage this election year carries with it, that is a lot to ask from a low volume rise.
Market Sentiment
VIX: 16.3; +0.8
VXN: 22.57; +1.24
VXO: 43.7; +27.88
Put/Call Ratio (CBOE): 0.94; -0.11
NASDAQ
Volume was up as NASDAQ tapped the simple 50 day MA and rallied to close positive.
Stats: +4.03 points (+0.2%) to close at 1990.77
Volume: 1.462B (+17.4%). Volume jumped but was still well below average as NASDAQ reversed off the 50 day SMA and managed a positive close. Hard to call it serious accumulation, but decent action.
Up Volume: 733M (+24M)
Down Volume: 711M (+199M)
A/D and Hi/Lo: Advancers led 1.2 to 1
Previous Session: Advancers led 1.09 to 1
New Highs: 94 (+38)
New Lows: 32 (+10)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Started soft and got softer, but never sold off. Indeed, it tapped the simple 50 day MA (1973) on the low and then rebounded for a positive close. Good intraday action in the face of bad news (rising oil prices) and a good hold of key support. After undercutting the March lows with a gap down and immediate gap back up, the techs have continued to work on that double bottom. Now they are moving laterally over the 50 day EMA after breaking over it last week. Looks like the quiet accumulation is still underway and is setting up a good pattern. This action allows more stocks to form their bases and set up for further moves. We will let the market be our guide, but we will also keep it in perspective; this is a summer rally, and as noted, they usually don't last forever.
QQQ is showing similar action to NASDAQ though it never undercut the March lows. It is trying to form a handle as well, however, something that will have to further develop over this week. Tuesday it closed lower on rising though still below average volume. A lateral move for a week would really set this up nicely.
S&P 500/NYSE
Excellent lateral move over the 50 day EMA, tapping it on the low and closing slightly higher. Setting up well.
Stats: +0.52 points (+0.05%) to close at 1121.2
NYSE Volume: 1.233B (+5.41%). Volume edged higher as the index moved laterally over the 50 day. Very nice action, reversing off the 50 day EMA as volume increases.
Up Volume: 598M (-31M)
Down Volume: 627M (+108M)
A/D and Hi/Lo: Advancers led 1.06 to 1
Previous Session: Advancers led 1.37 to 1
New Highs: 79 (+14)
New Lows: 20 (+5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 has shown two tight dojis over the 50 day EMA (1114.25) the pat two sessions after breaking through that key level last week. As with NASDAQ, this is setting up a handle to its 3 month double bottom base where the easy sellers are shaken out as they get frustrated that the move is not continuing. Once they are gone there is a break higher. Classic double bottom action with the right leg undercutting the left (March low) and then rebounding on some rising volume. It has not been breakaway volume, but it provided a follow through and now the index is trying to set up for a further move higher as the large caps try to form up for another break higher. This is very constructive action as it has near resistance at 1125; it is holding its gains off the lows and building for a break over that resistance.
DJ30
Not as clean a pattern as NASDAQ or SP500 because DJ30 still has yet to clear its 50 day MA (10,213 EMA, 10,246 SMA). It needed to clear that level to form the handle as it is too low in the rebound from the bottom of the right leg of its attempted double bottom to be an effective shakeout. It remains between the 50 day MA and the 200 day SMA (10,068).
Stats: +14.2 points (+0.14%) to close at 10202.65
Volume: 166 million shares Tuesday versus 159 million Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
It took a bit of doing, but the market shook off the oil concerns and looked favorably upon the solid ISM and construction data. Without a lot of earnings and the market having pulled back after the earnings season, it has been able to look ahead once again to what an economy expanding faster than most expected will be able to produce in the way of earnings. Tuesday it even seemed investors were factoring in higher oil prices and still coming up with a positive outlook.
It does not hurt that the Iraq situation is, despite what is reported each day, is actually getting under control. The new head of the interim government is not that US friendly but is very much pro the new Iraq. That may seem bad for the US but it is really good. He is getting a favorable reception, and as long as the Iraqis buy into the new government it is going to succeed. The trouble won't be over, but it will be the beginning of the end. We said that the market will start pricing this in at some point. The news Tuesday regarding this new government head may be the catalyst that starts coalescing the idea that the handover will take place and that it will succeed in some form of independent Iraq that is not a US clone nor an Islamic state.
No economic news scheduled for Wednesday, but the eyes will be turning toward Friday's employment report. We think the 200K+ estimate is completely in line and may be light given the ISM number. 200K per month through the year is about right. Indeed, given the strong construction numbers, the GDP will have to be revised higher toward 5%.
Tuesday the market showed good action, coming back from early selling to close positive and further building a good accumulation pattern. We still want to see more volume in the upside moves; overall volume continues to be light. We would like to see the handles form for another 3 or so sessions and then break higher on much stronger trade.
That is best case scenario. We have to keep in mind this is an early summer rally and we have to keep that mind. Summer rallies look good until they turn bad and fizzle out. The market still faces a lot of uncertainties, but we are seeing signs the market is starting to put these into perspective for a further move higher. Given what we know about summer rallies and what the market is starting to show us, we are moving into positions that are showing solid moves. Maybe not huge breakouts, but solid volume moves through key resistance that provides good upside opportunity. We were doing that Tuesday, and we will continue to look at the same opportunity as the market rally progresses. This lateral action is a good setup for another move higher, and we are using it to pick off some good movers that are making the break ahead of the overall market and will thus provide us good gains when the market does makes its break higher after this handle pattern forms.
Support and Resistance
NASDAQ: Closed at 1990.77
Resistance: 1990 to 2000, the top of the late 2003 base. 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: The simple 50 day MA (1973) and 50 day EMA (1967). The 200 day SMA (1958). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1121.20
Resistance: 1125 stalled the last bounce attempt. 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: The exponential 50 day MA (1114), and the simple 50 day MA (1117). The 18 day EMA (1108). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1086). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.
Dow: Closed at 10,202.65
Resistance: The 50 day EMA (10,213). The simple 50 day MA (10,247) and price resistance at 10,250. 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: The 18 day EMA (10,114). The 200 day SMA (10,068). March low (10,007). 9900-9850.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
6-01-04
Construction spending, April (10:00): 1.3% actual, 0.4% expected, 2.4% March (revised from 1.5%).
ISM Index, May (10:00): 62.8 actual, 61.5 expected, 62.4 April.
6-03-04
Productivity, rev. Q1 (8:30): 3.7% expected, 3.5% prior.
Initial jobless claims (8:30): 337K expected, 344K prior.
Factory orders, April (10:00): -1.0% expected, 4.3% March.
ISM Services, May (10:00): 66.0 expected, 68.4 April.
6-04-04
Non-farm payrolls, May (8:30): 215K expected, 288K April.
Unemployment rate, May (8:30): 5.6% expected, 5.6% April.
Hourly earnings (8:30): 0.2% expected, 0.3% April.
Average workweek (8:30): 33.8 expected, 33.7 April.
SUBSCRIBER QUESTIONS
Q: Thanks for the service. Very happy with it. The stock picks are great, but the commentary on the market provides the most insight. I have noticed that the NASDAQ weekly is having trouble with the 50ema crossing the 200ema. Do you pay heed to this or is this not of consequence?
A: Moving average crossovers are a technical analysis tool that can be useful in predicting advances or declines in the movement of a stock or index. A crossover simply describes the movement of one moving average crossing over a second, with one being shorter (faster) or longer (slower) than the other. Crossovers can give buy or sell signals for shorter or longer term moves of a stock or index. We watch for crossovers, up or down, both intraday or longer term to give us a better idea as to future moves and thus better buy or sell points.
For an intraday example, consider a stock that is moving up its 5-minute moving average and occasionally bouncing off its longer 15-minute MA. If it crosses below the 15-minute MA and fails on a test to break back over, that is usually a signal that the stock is going to sell down from there at least in the short term. When a stock is trending down intraday, the 5-minute MA will move up to test the 15-minute, but will fail. If it breaks back over the 15-minute MA, tests, and then continues to move up, that's a sign that the stock is moving up in the short term.
A longer term scenario is what you describe in your email with the Nasdaq. To start this month, on a daily chart the Nasdaq's 18 EMA crossed back down through the 50 EMA, and the market sold off. Essentially the index has shown this crossover twice since early March, and that has kept the index trending lower all year. Now we see the 18 day EMA coming back up toward the 50 day MA; it will make a key test over the next couple of weeks. If it can break through that is a sign of further near term advance.
Crossovers are important indicators which work best when used with other technical analysis tools like price patterns, volume, or trend analysis. When a crossover occurs at a key support or resistance level, the trading signal can be even better.
End part 1 of 3
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