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us stock market, trade stock
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6/02/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
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Trailing stop alerts: None issued
Stop alerts: MCO
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SUMMARY:
- Another late recovery on slightly higher trade as indexes continue setting up for next move.
- CEO survey shows optimism, but as at the economic turn, CEO's are a surprisingly lagging indicator.
- SP500 tests 1125, sets up for a move higher.
Positive intraday action as market builds toward its next move.
Oil prices backed off over $2/bbl on OPEC pledges to produce a lot more oil, enough to drop prices by a claimed $6 to $8 over the next two weeks. That got the market's attention along with a letter from Greenspan to Senator Sarbanes penned just two weeks back that stated the Fed could go slow given the low inflation and slack production. That set a favorable background for stocks to once again overcome some early softness and rally in the afternoon session. Not all positive closes on the indexes, but positive intraday action once more as the market continues to work laterally, setting up for the next upside move. Wednesday was another solid building session ahead of a further break higher in this summer rally.
It is not a great summer rally at this stage as volumes have languished even as some very good stock moves have been made. Summer rallies, however, are typically far from perfect. When stocks start moving we start looking at the good stocks and picking them off as they make solid moves in order to partake in as much of the rally as possible before it loses steam. You never know with summer rallies; they look good until they don't. In 2000, the summer rally looked great with strong volume surges and low volume declines. That too came to an end rather quickly, however, after a sweet but short summer move.
THE ECONOMY
CEO's show optimism for the future.
We remember back in 2002 when there were definite signs the economy was improving but some analysts kept citing the lack of CEO optimism about the future as a sign the market would not go anywhere soon. It makes some intuitive sense: if CEO's, the holders of the corporate purse strings, are not excited about the future, then surely there won't be any real improvement as they don't make any substantial investments.
Reality lies elsewhere. CEO's are notoriously pessimistic when a recovery starts, refusing to acknowledge any improvement until it is well underway. With the added layer of regulation and lawsuits regarding corporate malfeasance in 2001 and 2002, CEO's were even less inclined to be optimistic about the future for fear that if something killed off the recovery they would be left open to suits claiming they misled investors, etc. Thus we heard nothing good from CEO's even as the reports came in showing that companies were making some substantial capital investment in their businesses.
Thus when the CEO Economic Outlook Survey was released on CNBC Wednesday showing CEO's were optimistic on several fronts, we were not too enthused. 88% said sales would increase (99% said increase or remain flat), 44% said capital spending would increase (93% said increase or remain flat), and 38% said employment would increase. In this climate of sue first and ask questions later, you know that the CEO's are only stating what they see as the obvious. Well, the obvious has been obvious for months and months. If anything, the fact that CEO's are now mostly sanguine about the economic recovery is one reason to stay alert for signs of economic slowing. We don't believe the economy is in danger of rolling over near term, but CEO confidence is a factor to keep in mind when weighing the market's future prospects. It is much like employment: CEO's don't turn on the hiring light until they start losing business because they cannot handle the demand. They wait to hire until they have to. Similarly, they wait to acknowledge a recovery until they would look like an idiot if they continued to deny its existence. With the CEO's on board with the recovery, seems the only ones left in denial are those in Washington, D.C. Just goes to show that you can take any set of facts and argue around them to fit your designs.
Friday jobs report will give the Fed three in a row.
The Fed has been clear it was not going to make any interest rate move until it had seen three good jobs reports. Friday brings the May report, and with expectations running 225K (upped from 215K) or better and the ISM report showing serious jobs growth, the likelihood of the third big month in a row is high. The 3 month total could conceivably close in 1 million, giving the 2 million job creation estimate at the start of the year credence or even making it look quite light.
With the market setting up with a good lateral move after the jump off the May low, a strong jobs number could this time be the catalyst for a breakout. The market is responding more favorably to economic data once again as the economic expansion, despite the detractors' claims, continues to surprise with its strength. Strong jobs also means the economy becomes less and less an issue in the election (though it has already lost its primacy in the democratic play sheet).
Regardless of what side anyone favors, no one can honestly want the economy to falter. Thus the continuing improvement in data at 20 and 30 year record growth rates is excellent news for all. Sure the economy went down a long way, but is it not fantastic that it is leaping back at record rates? Remember when Greenspan said any recovery would be anemic given the lack of a deep plunge into recession? Well, he was wrong on several points. Primarily, the plunge was deep. GDP was screaming at greater than 7% growth rates. In less than 3 short quarters it dropped to negative growth rates. That is a nasty plunge. Sure consumers continued to spend, but a one-dimensional economy is not a healthy one. When the businesses finally started to buy into the recovery, the recovery has soared to record growth levels. All of this investment is going to create a flood of jobs over the next ten years. The jobs floodgates are already opening, and it is absolutely false to say they are late in coming. They are actually ahead of the curve when you look at the real indicator of an economic bottom, i.e., when the stock market bottoms. The economy is not going to recover until after the market bottoms. The jobs growth engine has started humming, and this investment made in the US is simply going to continue.
Before we sound too rosy . . .
Of course, oil is another problem. Oil is too high. It may have peaked, but will it drop enough to ward off a real economic slowdown. The one thing we have going for us is that the economy is not so energy dependent as it was in the 1970's and 1980's. We get more GDP dollars per BTU than ever before despite all of the claimed gas guzzlers that are bleeding us dry. Oil prices thus impact the consumer to a greater degree. That helps the recovery as it is now being driven by the business side after three dormant years. As we saw in the early 2000's, however, the economy cannot live for long with just one side. Consumers will need lower gas prices, and we will just have to see if the price can drop fast enough if more oil production comes on line. The problem, however, is with the refining process, and with limited capacity and lots of different blends that have to be created, there is not much light in the tunnel until mid-summer.
THE MARKET
The indexes closed mixed, but they also continued the lateral consolidation as well as good intraday action (soft open, stronger finish). No watershed day, no change in character, but another steady building session as the market tries to consolidate the move off the May low and set up the next break higher.
SP500 actually edged over resistance at 1125, but could not hold the move to the close with only slightly rising trade to support it. It does show the level is vulnerable, and after more lateral movement it will be ready to make the break higher. NASDAQ was positive, but it was struggling along with semiconductors all session and faded negative on the close. Still, it too remains in its lateral consolidation over the 50 day EMA, preparing for the next catalyst to send it higher.
Market Sentiment
VIX: 16.08; -0.22
VXN: 22.61; +0.04
VXO: 16.24; -27.46
Put/Call Ratio (CBOE): 0.91; -0.03. Still a lot of downside hedging continues as the market tries to set up for the next move. There is still a lot of pessimism about a further rise, and it is not necessarily among speculators. A lot of the put activity involves institutions hedging their portfolios just in case there is failed rally that turns into more selling.
NASDAQ
Gapped higher, tapped toward the 50 day SMA, then closed flat. Continues its consolidation over the 50 day as it tries to set up for the next breakout.
Stats: -1.79 points (-0.09%) to close at 1988.98
Volume: 1.523B (+4.16%). Volume again edged higher but was still well below average (approximately 1.8B) as NASDAQ maintained its lateral move setting up the handle to its double bottom.
Up Volume: 755M (+22M)
Down Volume: 685M (-26M)
A/D and Hi/Lo: Advancers led 1.08 to 1. Matched the action, i.e., a standoff.
Previous Session: Advancers led 1.2 to 1
New Highs: 90 (-4)
New Lows: 23 (-9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher but struggled all session as it was unable to crack 2000 on the high, but held the simple 50 day MA (1975) on the low. The move continues the 4 session lateral slide along important support for the index to continue building toward the next break higher in its 4 month base. Stocks continue to build there bases and prepare for the break higher as well, and once again we saw a scattering of stocks that made strong moves ahead of the market. Retail remains quite buoyant though it is not surging higher on strong volume.
QQQ also continues to work laterally over its near support, holding flat on rising though still below average volume. Its double bottom pattern has a bit more form to it, and the handle is forming up closer to the 'hump' in the middle of the pattern at 37.50 that it will need to smash to really have a solid breakout. One day at a time at this point as we let it complete its base and show us the breakout.
S&P 500/NYSE
Broke over 1125 but could not hold it to the close as it lacked strong volume. Still setting up well for the next move.
Stats: +3.79 points (+0.34%) to close at 1124.99
NYSE Volume: 1.252B (+1.55%). Volume edged higher but was still well below average as the large caps tested near resistance and eased back to close just below that level. Decent volume on the follow through, but we would really like to see a stronger surge on the next break higher.
Up Volume: 713M (+115M)
Down Volume: 525M (-102M)
A/D and Hi/Lo: Advancers led 1.52 to 1
Previous Session: Advancers led 1.06 to 1
New Highs: 113 (+34)
New Lows: 18 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Hit 1128.10 on the high, clearing resistance at 1125 but without strong trade it could not hold the move to the close. Breaking this level looks more likely to be a matter of time, i.e., letting the market continue the lateral move and then break higher on volume. We like the action; consolidation after a move higher while holding onto the gains is the solid pattern building you want to see in a sustained move. Thus far it is doing what it needs to do.
DJ30
The blue chips and other large caps were relative strength leaders all session, though given the market that is no great endorsement. When the smaller caps and techs are not leading higher they are leading lower; the large caps seems to maintain the status quo, at least on the Dow. DJ30 did make an important move, however, closing above the two 50 day MA (10,215 is the 50 day EMA; 10,250 is the 50 day SMA). The move pushed it through some key resistance on rising though still below average volume. The move puts DJ30 more on par with the other indexes and in better shape to move with them after another session or so at this level.
Stats: +60.32 points (+0.59%) to close at 10262.97
Volume: 185 million shares Wednesday versus 166 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data starts to get interesting again with factory orders, ISM services, and the next iteration of Q1 productivity. As noted, economic data is starting to have a positive impact again on stocks, but the Friday jobs report still has sway because investors are correctly focusing on it as the best indicator of the Fed's move. Another strong report and it is ready to start the rate hikes at the June meeting. Of course, that means simply more speculation as to how far and how fast the Fed will move. Greenspan continues to say he will go slow, something we discussed last week as not necessarily the best plan of action at this time in history. Go ahead and tell the market what you think neutral is and then tell the market you are moving rates up to that point or just below it. Then do it once you give the market time to adjust. Credibility, certainty, room to maneuver in the event of the inevitably unforeseen problems yet to arise. The Fed, however, is not going do that with this chairman.
We are looking at the employment report as the potential catalyst to send the market higher on a breakout from the lateral consolidation formed this week, but the market likes to anticipate news. We could see a break higher Thursday in anticipation of a strong report, but we want to see volume as it does make the move in order to give it credibility. That may not come until Friday. We will continue to look at good patterns and try to pick off the stronger leaders when they make their moves and thus be ready for the move higher. Thus when there is a big rush into stocks on the catalyst, we will be watching our positions appreciate as the rest of the market bids them higher. We believe the market is showing us some positive action as it sets up for another move, and thus we have been willing to step into new positions. We will continue to do so as we wait for that break higher.
Support and Resistance
NASDAQ: Closed at 1998.98
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 (1975) and 50 day EMA (1968). The 200 day SMA (1959). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1124.99
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 (1110). 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 10,262.97
Resistance: The simple 50 day MA (10,251) and price resistance at 10,250 is cracked but not totally broken. 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: The 50 day EMA (10,215). The 18 day EMA (10,130). The 200 day SMA (10,073). 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): -1.4% expected, 4.3% March.
ISM Services, May (10:00): 66.0 expected, 68.4 April.
6-04-04
Non-farm payrolls, May (8:30): 225K 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.
End part 1 of 3
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