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6/03/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued. Did not see the moves we wanted.
Buy alerts issued: None issued
Trailing stops issued: None issued
Stop alerts issued: FCEL; AET
SUMMARY:
- Market gets nervous ahead of jobs report despite good news.
- Economic data solid if not blowout ahead of jobs report.
- Indexes thud down to support, but hold the range on light volume.
- Intel guides higher than expected as it narrows the range at a higher level.
Stocks unable to rally back, selling to the lows on the close.
Stocks reversed their bullish intraday pattern of the past two sessions, trading nervously all session. The critical event for the market was when SP500 tested 1125 again but failed to take it out. We noted in one alert today that the test would be the big event for the market, and that we did not expect it to be successful ahead of the jobs report. It was not successful, and investors decided not to step in ahead of Intel's mid-quarter report and the Friday jobs number. Stocks turned lower and then sold off harder in the last hour to session lows. NASDAQ broke below the 50 day MA but managed to hold at the 200 day SMA. SP500 slipped through the 50 day SMA but did hold the 50 day EMA.
This was weaker action than we wanted to see, but it was not a breakdown. The indexes held their recent ranges other than SOX and the selling was on continued very light volume. There was no heavy selling, just a lot of nervous investors that decided not to step in ahead of the jobs report even though jobs are expected to be strong. Maybe that was the problem; expectations are getting a bit too hot, and that can set up disappointment. In any event, there were not a lot of sellers, just a lot of bids being pulled when SP500 failed to take out 1125. That pushed prices down significantly but volume did not follow, the one silver lining in the action.
THE ECONOMY
The selling was not due to a lack of decent economic data as the economy continues its solid improvement. The news was a mixed bag with some better than expected, some worse than expected, some just about in line, but all still show a solid trend remains though the full impact of higher energy prices and Fed rate hikes remain wildcards.
Q1 productivity revision greater than expected.
Originally reported at 3.5% growth, productivity moved to 3.8%, topping expectations of 3.7%. Productivity was cursed by those carping about lack of jobs and outsourcing. Now we are seeing a surging jobs market even as productivity growth remains very strong. Greenspan said that jobs would improve when productivity declined; he was wrong as well. Jobs are growing in part BECAUSE productivity continues to climb. Productivity brings us more for our dollar spent, it raises our standard of living, it opens the door to even better jobs in the future. Rising productivity is part of a healthy economy that is making the right moves, i.e., investing in itself for more growth. That investment fuels growth as the supply side rushes to meet demand and beyond. Very good for the economy.
ISM services backs off its record high, but still turns in a solid month.
May was another good month with the index reading 65.2, its thirteenth consecutive over 50. New orders edged slid to 61.3 from 65.6, weaker but still solid. This got little play, however, in view of the employment sub-index that rose for the eighth straight month, coming in at 56.3 versus 54.5 in April. That had many excited, but as we have noted, employment is a lagging indicator, one of the last to start higher and one of the last to fall off after an economic decline starts. It is an election year, however, so the most visible and emotional aspects of the economy get the most play.
Similarly, prices paid received a lot of ink again as it jumped to a record high at 74.4, trouncing April's 68.6 reading. This means that labor costs are increasing, i.e., wages are rising. That is typical when the job market heats up. Unlike the Fed, however, we don't buy off on the argument of 'wage-led inflation'. You don't cause inflation because you pay people more. If the economy is expanding and they are producing more, higher wages do not represent more money chasing the same amount of goods and services. Only when output is restricted and thus limits available goods and services would wages have an impact on prices. And it would take a lot of restriction and a lot of wage hikes to do it.
Same store sales solid.
Retail stocks have been showing solid patterns and gains, and they have been foreshadowing the better than expected news to come. Thursday saw many reporting better than expected. WMT hit the very top of its range. JCP sales rose 9%. ARO, CHS, GPS, AEOS, ANF and other apparel stores reported strong sales. The consumer has yet to give up shopping in the face of higher gas prices. At $2+ per gallon, how long that can happen remains to be seen. For now malls are reporting strong traffic and sales continuing through the weekend, so the pinch has not been felt yet.
OPEC agrees to raise output.
Officially OPEC agreed to a 2 million barrel per day increase effective July 1. That was less than the 2.5 million Saudi Arabia advocated, but OPEC said it would increase production that extra 500K barrels in August if it is needed.
So now it is official, but OPEC is already producing past its quota, and Saudi says it will produce over 10 million bbl/day if needed. Basically OPEC is ready to produce what it takes to help control price increases and the meeting simply put an official stamp on the cheating. It is good to note that Saudi stands firm on its commitments even in face of the attacks on its compounds last week.
Oil fell below $40/bbl on the session, aided by the OPEC action and news that US inventories of crude and gasoline were higher than expected. It is not a clear break of the trend, but it is waffling. We still feel prices have peaked though as we have pointed out before, that does not mean a decline necessarily follows. It does allow the market to start looking ahead, however, and that is the key. Once they can look past the time prices are rising it can start pricing in the future once more.
THE MARKET
The price losses looked ugly, but support held and volume was still very light. As noted, that means no big jump in sellers but a lack of bids that allowed those few wanting to sell to push the market around. It is key to note that the range held on NASDAQ, SP500, QQQ, DJ30, and the small caps. After two sessions of soft opens leading to late rallies, the momentum ran out Thursday ahead of a jobs report that the market continues to obsess over. Still, the range held and the base building continued with the indexes still working on their lateral moves after bouncing up off the May lows. Indeed, the Thursday action could have very well been the final shakeout that often occurs right before the break higher as those ready to sell go ahead and cut and run when the move appears to be failing.
While most indexes held their ranges, SOX caved again, falling through the 50 day EMA as well as the 10 and 18 day EMA. Unlike the other indexes, SOX is not even trying to put on a lateral move, dumping lower in two sessions. Not a total breakdown, but it is not showing the same strength as the other indexes. SOX can be a leader, both upside and downside. It was struggling Thursday along with SMH (Semiconductor holders trust), the latter breaking lower on continued strong volume. We will see if it was all nervousness ahead of Intel's mid-quarter update that turned out quite solid.
Market Sentiment
VIX: 17.03; +0.95
VXN: 23.93; +1.32
VXO: 17.29; +1.05
Put/Call Ratio (CBOE): 1.13; +0.22. The ratio jumped right back up as the market pulled back on continued light volume. Investors and institutions continue to hedge to the downside, and that shows us that there is not a lot of confidence in the current base building. It may fail in a ball of fire, but this is the same kind of concern and worry we saw in early 2003 during that base building period when pessimism remained high as the market put in the necessary groundwork to continue the move higher. That is trying to do the same here but the action as noted the past two months has been a bit rougher around the edges as it has to consolidate a much larger move than the bounce from the October lows back in early 2003.
NASDAQ
Snapped the 50 day SMA and EMA but managed to hold the 200 day SMA on the close on continued light volume.
Stats: -28.72 points (-1.44%) to close at 1960.26
Volume: 1.534B (+0.72%). Volume edged higher, but it was marginal and still well below average. Given the size of the point drop, it needed the lower volume to indicate few sellers on the decline. That means not much erosion occurred, but it still has to hold and show a higher volume breakout.
Up Volume: 344M (-411M)
Down Volume: 1.17B (+485M)
A/D and Hi/Lo: Decliners led 2.54 to 1. Techs were nervous cats all session ahead of the Intel update. The selling was broad, but the volume was not hefty.
Previous Session: Advancers led 1.08 to 1
New Highs: 52 (-38)
New Lows: 34 (+11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A 1.4% price drop was not what we wanted with NASDAQ breaking the two 50 day MA (1976, 1967). It managed to hang on to the 200 day SMA (1960), but it was more like a thud to that level as NASDAQ tanked in the last 10 minutes. Not a pretty price loss, but it occurred on continued light trade. It is again at a do or die point at the 200 day SMA if it is going to maintain this handle formation to the attempted double bottom.
QQQ held up better, tapping at the 50 day EMA (35.80) on the low and rebounding slightly to close. Volume was lower, indicating the largest cap techs were not distributing, just lacking buyers. This index continues to look better than the overall NASDAQ and provides support for the larger index to hold and make the breakout as well.
S&P 500/NYSE
Slid down to the simple 50 day MA on the close on lighter volume. The large caps held the pattern better than NASDAQ and still look good.
Stats: -8.35 points (-0.74%) to close at 1116.64
NYSE Volume: 1.23B (-1.76%). Volume contracted and was still well below average as the large caps sold lower. Holding key support on lower volume is good action during a consolidation. That is the action you want even if the selling may have been more price-wise than wanted.
Up Volume: 240M (-473M)
Down Volume: 985M (+460M)
A/D and Hi/Lo: Decliners led 2.71 to 1. The smaller caps were the big losers on the session other than SOX, no doubt part of the rebalancing that is ongoing through June 10. Without their upside participation, breadth was ugly.
Previous Session: Advancers led 1.52 to 1
New Highs: 50 (-63)
New Lows: 17 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 made another test of 1125 resistance where it has failed before, and when it could not break through that set off the selling, or more appropriately, the pulling of bids to buy. The index lost its steam at that point and spent the remainder of the session fading. It undercut the simple 50 day MA (1117.96) but held over the 50 day EMA (1114.74). That keeps the large caps easily in the consolidation range as investors kept it honest after that low volume rally attempt Wednesday. Still set to make the move, but as always we will have to see it happen.
DJ30
The blue chips tried a move Wednesday as well and were tossed right back Thursday as was SP500. After taking back the 50 day EMA (10,253 simple, 10,214 exponential) Wednesday, it gave them right back. No problem as it is still in its pattern though the pattern is not as solid as SP500.
Stats: -67.06 points (-0.65%) to close at 10195.91
Volume: 162 million shares Thursday versus 185 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Jobs. Arguably the most lagging indicator of all, but in an election year it becomes the focus. Of course a lot of that focus is also attributable to the Fed as it said it was not going to raise rates until it saw a sustained recovery in job growth. Thus the obsessing on this lagging indicator.
It can act as a catalyst, a trigger to buy. We say that as opposed as to the sole reason to buy because the market knows jobs are lagging. It has already priced in a good move and is working during this consolidation to get ready for the next. Whether it does trigger buying and the breakout from the current consolidation patterns depends upon whether the market has come to grips with the Iraq handover, oil, and the Fed's rate hiking campaign to come.
There are signs it is dealing with oil as oil appears to have peaked in its price climb barring some calamity in the major oil producing countries. That is a worry that will continue to hang over the market to varying degrees as there is nothing we can really do about that other than continue the fight against terrorists. As for Iraq, there have been some positive developments with appearances of legitimacy for the new Iraq government. As for the Fed, Greenspan continues to use the 'measured pace' lingo, and we hear he has been at the White House an unusual number of times recently, no doubt having to fully explain his plans to the administration. These are signs of a market coming to grips with problems confronting it, but until we see the breakout on strong volume, they are just signs.
The semiconductors were on the run Thursday, a big part of NASDAQ's problems. After hours Intel narrowed its revenue range, bringing the midpoint higher than its guidance and street expectations. It noted that the growth was in flash telecommunication chips, and that took some of the bloom off the rose. Intel's big margins are in the processors for PC's and other devices. That, however, does not hurt the chip market as telecommunications, particularly wireless, has been the growth area. Thus stocks such as BRCM were up smartly after hours, but faded as the late session wound down. It is more good news for stocks, but again, the key is whether it is enough to trigger buying at this point. SOX needs to stem the selling if stocks are going to make the break, and the Intel news is timely in that respect. The factors are coming together. It remains to be seen if they are enough as compared to the continuing and yet unresolved issues of rate hikes, oil prices, and Iraq.
We note again, however, that the market makes up its mind on these long before the answer is obvious. That means we continue to look for the good movers ahead of the market as they will provide leadership in any breakout. Thursday we were being patient as the market was not peppered with the kind of moves we wanted.
Support and Resistance
NASDAQ: Closed at 1960.26
Resistance: The 50 day EMA (1968) and the 50 day SMA (1976). 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 200 day SMA (1960.76). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1116.64
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 50 day SMA (1117.96) is trying to hold. The 50 day EMA (1114.74). The 18 day EMA (1110.85). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1087). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.
Dow: Closed at 10,195.91
Resistance: The 50 day EMA (10,215). The simple 50 day MA (10,253.55) 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 (10,137). The 200 day SMA (10,077). 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): 3.8% actual, 3.7% expected, 3.5% prior.
Initial jobless claims (8:30): 339K actual, 337K expected, 345K prior.
Factory orders, April (10:00): -1.7% actual, -1.4% expected, 5.0% March (revised from 4.3%).
ISM Services, May (10:00): 65.2 actual, 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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