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investment help, Breakout test
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6/14/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: None issued
Buy alerts issued: TUNE; SEMI
Trailing stops issued: WWCA
Stop alerts issued: Continued to trim if showed trouble, narrowing on those holding up best. FARO; RHAT; ATRM; ACLS; ZILA DAB
SUMMARY:
- Ready to sell on the open, market gives back breakout attempt.
- Retail sales remain strong as consumers buy domestic, foreign goods.
- Back in late May range, indexes trying to hold last support for another bounce attempt.
- Market braces for CPI report.
A weak start sends indexes back to key support levels.
Futures were down early and strong consumer sales and a wider trade gap did nothing to change them. The market was ready to sell and it spent almost the entire session doing so. A late bounced took the indexes off their lows, but it was nothing to change the character of the session.
It did help push NASDAQ back over its 200 day SMA and SP500 back above 1125, both key support levels, but volume was higher, the second higher volume selling session on NASDAQ in the last three. Low volume distribution, but with the overall volume levels low, these sessions have the same impact of eroding the foundation established in the mid-May bounce and follow through.
The close saw stocks fall back into the late May range, giving back that move but not yet breaking down. Stocks are not showing tremendous vigor, but they are still in the ballgame where they can make a higher low here at important support and once more take on that down trendline from early 2004. The buyers and sellers are pretty evenly matched here as stocks are squeezed between that trendline from above and the 50 and 200 day MA from below. As of yet there has been no definitive resolution of the Iraq, Fed and energy issues, but there has been softening energy pricing, the June 30 handover is drawing near as is the June FOMC meeting. Stocks are either going to continue the early summer bounce here or give it up.
THE ECONOMY
May retail sales remain strong, imports rise as consumer continue to consume.
To many it is the paradox of economic reports as to how the consumer can purportedly lose confidence yet buy more and more goods. First, we have to realize that retail sales measure total prices of goods sold, not units. Thus if prices surge, retail sales can rise even if units sold are stagnant or even fall. For example, gasoline sales are part of retail sales, and if you still fill up when you go in, it costs more for the same amount of goods. Pretty simple, but easy to overlook.
There is another aspect often overlooked as well: consumers rarely consume in relationship to their sentiment, at least until sentiment gets very low. Thus we don't sweat too much about sentiment purportedly slipping at these levels. The economy is simply too strong right now, regardless if polls showing the majority think it is worse off, for that to hold water. The economy has to be in dire straits for confidence to hit levels that negatively impacts demand. That basically occurs when consumers are getting handed pink slips in large numbers and the fear of getting one runs high.
That is not happening now. May retail sales rose 1.2%, up 0.7% without auto sales, right in line with expectations and a solid increase over the -0.6% showing in April (revised from -0.5%). Consumers continue to consume, showing the usual ebb and flow from month to month, but also continuing the trend of rising sales. Again, that is attributable to both some rising costs and some rising consumption.
April imports surge again.
The other supposed paradox is rising imports versus exports. This detracts from GDP (it is not domestic production) and it also raises worries about needing more and more capital to finance our current account with the rest of the world. That frightens some economists with respect to interest rates and currency strength if there is not enough interest in U.S. products.
The gap between imports and exports hit an unexpected -$48.3B in April (-$45b expected, -$46.6B March), renewing those concerns. The paradox is a concern that growing trade deficits indicate a weaker economy by virtue of lowered GDP, etc. The past few decades, however, have shown that when the US economy is strong, US consumers buy domestic and foreign goods. Foreign countries have geared a lot of their production to satisfy that demand. Thus it is not really as much of a balancing act as it is made out to be: these countries need our consumers to maintain their economies, and they are not going to stop finance their own industries over fears the imbalance is too large.
Again the real concern is whether we are producing what the country needs to meet demand. There is concern that domestic producers, while starting to hire and increase production, are not really opening the floodgates. Capacity and utilization rates remains sluggish, wholesale and business inventories remain lean, producer prices are rising. We will learn more Tuesday if consumer prices overall continue to climb in addition to medical, education and other costs that have been ahead of the curve (we have discussed several times that insurance, medical, and education have been rising all along).
In prior economic expansions since the early 1980's those prices have not made significant migration into the consumer prices. With the reluctance to push production significantly higher, we remain concerned that demand is outstripping supply and is pressuring prices. There needs to be more incentives for businesses to expand production and produce. Already we are seeing business expenditures dip some ahead of the end of the tax incentives. The uncertainty as to whether the tax rate cuts will remain is a key factor. There will be a surge of buying to end the year as the 2004 capital investment incentives expire, but what about hereafter if, as it appears, supply is still lagging demand.
Gas prices falling at a critical time.
Even with retail sales rising in part on energy costs, gasoline prices have started to edge lower, dropping below $2/gal nationally. Prices fell an average 6 cents last week, a significant drop according to gasoline analysts given the timing. We have hit the peak months of consumption, and according the gasoline price and quantity statisticians, demand is "huge." To see a price drop in the face of such demand is indeed significant and shows there is definite improvement in the market as some of the speculation is removed following the recent peak in oil prices.
THE MARKET
The 'Reagan' bounce from last Monday has been given back as the indexes find themselves again in the late May, early June range. NASDAQ has started to show distribution 2 of the past 3 sessions; low volume still, but sellers are moving in ahead of buyers. It has the same effect of eroding the foundation of the move higher even though overall volume is light.
The near term focus seems to be interest rates with the CPI Tuesday and the fed funds futures contract pricing in 100% of a 25 basis point move and just over 30% for another 25 basis points at the June meeting. If not then, the additional 25 basis points is just about full factored in at the August meeting or even inter-meeting. The concern we hear from floor traders as to the rates and the low volume is that the Fed's 'we will go slow unless we do otherwise' mantra the past week leaves no certainty for investors. That keeps them on the sidelines, and as seen the past few sessions, erring to the downside.
That leaves the indexes at some important levels. NASDAQ managed to hold the 200 day SMA (1967) after undercutting that level on the low. QQQ was the better performer, tapping toward the 50 day MA on the low and rebounding to hold near the down trendline. SP500 ran below 1125 and near the simple 50 day MA before recovering to hold those levels. DJ30 performed well also, tapping the 10 day EMA and rebounding to hold the move over the down trendline and other lower support. These are key levels that showed some floor for stocks Monday. If this rally is to continue and try resistance again, those levels will have to hold on the close. The test may not be over for those support levels just yet, but as long as they hold, the indexes are setting up for another try at the resistance levels.
The drag was from the semiconductors as SOX fell through its 50 day EMA and down to the early June lows at 463. The mid-cap index undercut its 50 day EMA on the low as well, unable to bounce to recover that level on the close. The small caps are threatening a break below that level as well. Large caps are, for now, performing better, but with all stocks lower, that performance hardly instills confidence.
Thus we could see another test of the near support on the indexes and then another attempt at near resistance with the key being SP500 and NASDAQ clearing their down trendlines and taking on their April highs.
Market Sentiment
Last week the bulls pushed higher, up to 49.5% while he bears dipped down to 20.2%. A reading of 55% for bulls is bearish, while a 20% bear reading is bearish as well. This sentiment indicator is not supporting the market right now. Low volume and complacency about its prospects do not help fuel rallies, and the market has struggled after its attempted breakout two Mondays back.
VIX: 16.07; +1.03
VXN: 22.24; +1.01
VXO: 16.15; +2.32
Put/Call Ratio (CBOE): 1.32; +0.17. Jumped right back up on the return to selling. This indicator helped point out the rally off the May lows, but it has not opened the door for a big surge. The overall put/call ratio has closed near 1.0 on several occasions but has not held over 1.0 on the close during the period the CBOE ratio has shown these readings. We would like to see the overall ratio from all options markets combined give a couple of 1.0 or better closes to provide a better contrary indicator. We must remember, however, that this is still a secondary indication; it alerts us to a potential rise but we need to see the indexes hold support and show some better price/volume action on any rebound.
NASDAQ
Struggled on rising volume, managing to hold the 200 day SMA by virtue of a late but modest bounce.
Stats: -29.88 points (-1.49%) to close at 1969.99
Volume: 1.406B (+3.68%). Volume remained below average but rose on selling for the second out of three sessions. Two distribution sessions are weighing on the low volume rally, and it is at a point it needs to hold the line.
Up Volume: 341M (-405M)
Down Volume: 1.047B (+461M)
A/D and Hi/Lo: Decliners led 2.86 to 1. Came nicely off the weak early showing that pushed downside breadth over -3:1.
Previous Session: Advancers led 1.04 to 1
New Highs: 44 (+4)
New Lows: 60 (+20). No major rise in new lows as it tests the 200 day SMA.
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The 50 day MA (1979 simple, 1974 exponential) did not hold, and the 200 day SMA (1967) gave way intraday (1987 on the low) before a modest rebound recaptured that key level on the close. After edging over the 2004 down trendline (2009) last week the sellers took over; no surge in sellers, just more sellers than buyers on the way up, sending NASDAQ back to the bottom of the late May to early June range. This is where NASDAQ has to hold to avoid another decline toward 1900.
QQQ tapped the 50 day EMA on the low and managed a rebound to hold near the 2004 down trendline. It finished negative but still is holding up better than NASDAQ. It tapped the bottom of the late May to early June range and held. It remains in relatively good shape for another run higher toward the April highs at 37.50. The key is whether it will carry NASDAQ with it.
S&P 500/NYSE
Similar action to QQQ, the large caps tapped at the 50 day MA and recouped some losses. That keeps it in position to make another run at the 2004 trendline and the April highs.
Stats: -11.18 (-0.98%) to close at 1125.29
NYSE Volume: 1.18B (+1.2%). Volume edged slightly higher on the test of the simple 50 day MA as NYSE showed its second distribution session in three. As with NASDAQ that works to erode the rebound and follow through. That makes this test critical for the large caps that are trying to show some relative strength and leadership at this juncture to hold this level and get some upside volume as they take on the downtrend.
Up Volume: 163M (-518M)
Down Volume: 996M (+545M)
A/D and Hi/Lo: Decliners led 5.09 to 1. Impressive weakness in the small and mid-caps (-1.6%, -1.4%) really jumped this level higher. This is approaching the extremes that we have seen give rise in the past to a rebound. With SP500 holding the 50 day EMA and its overall pattern, it looks ready to try a bounce, and this high negative breadth reading is a contrary indicator that supports that premise.
Previous Session: Advancers led 1.27 to 1
New Highs: 41 (-8)
New Lows: 53 (+26)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Second selling session in three on rising trade after tapping toward the 50 day SMA (1120) on the intraday low. The distribution is not a positive, but the pattern is still solid as the large caps continue to hold above key support at the 50 day and the top of the recent late May to early June range. While we don't like to see the index give back the break higher, it is holding at important support and that allows it to make another run at the 2004 down trendline at 1135. It tapped that resistance on the high Monday and turned tail. After this test back to the 50 day that may take another session, we anticipate another attempt at the downtrend.
DJ30
Still holding up decently, tapping the 10 day EMA (10,302) on the low and rebounding to close near the 2004 down trendline (10,340). Volume was higher on the selling but the intraday low tapped a support level and helped bounce it. Similar to SP500, DJ30 may try 10,300 down to the 50 day MA (10,266 simple) before a rebound attempt, but then once more try to move toward the April high (10,570).
Stats: -75.37 points (-0.72%) to close at 10334.73
Volume: 166 million shares Monday versus 154 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
With the Fed and its actions appearing to take center stage this week, the Tuesday CPI is receiving the primary focus. It is out before the open and the concern is that the increasing producer prices will find their way into consumer prices, something that has not happened in the last few recoveries. With supply still potentially lagging demand domestically, the CPI could show 3% or more annual increases. Expectations have crept higher to 0.5% from last week. That would cause even more angst regarding the Fed speeding up its rate hiking given its open ended statements regarding how and when it will raise rates.
A higher than expected CPI would send the indexes back to test near support and even an intraday move below those levels. Then we see if they can make the rebound to continue this early summer rally to once more take a shot at the April highs. Overall the move lacks real conviction, more of a typical early summer move with the trade levels even slower due to Iraq, the Fed and the election.
So we head into Tuesday looking for another test of support, then a rebound attempt to try and continue the rally up to early July. That does not leave a lot of time, but we also don't expect the market to make it far past the April highs when it does try the rebound.
Support and Resistance
NASDAQ: Closed at 1969.99
Resistance: The 50 day EMA (1974) and the 50 day SMA (1979). 1990 to 2000 is the top of the late 2003 base. 2009 is the January/April down trendline. 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 (1967). 1900 to 1890. The April lows (1880, 1878).
S&P 500: Closed at 1125.29
Resistance: The March/April down trendline at 1135. 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: 1125. The 50 day SMA (1120) and the 50 day EMA (1118). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1091).
Dow: Closed at 10,334.73
Resistance: Late April peaks (10,478 to 10,512). 10,570 is the early April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: The January/April down trendline (10,340). The 50 day SMA (10,266). Price support at 10,250. The 50 day EMA (10,247). The 200 day SMA (10,106). March low (10,007). 9900-9850.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 14
Trade Balance, Apr (08:30): -$48.3B actual, -$45.0B expected and -$46.6B prior (revised from -$46.0B).
Retail Sales, May (08:30): 1.2% actual, 1.0% expected and -0.6% prior (revised from -0.5%)
Retail Sales ex-auto, May (08:30): 0.7% actual, 0.4% expected and -0.1% prior
June 15
PPI, May (8:30): DELAYED 0.6% expected and 0.7% prior
Core PPI, May (8:30): DELAYED 0.2% expected and 0.2% prior
Business Inventories, Apr (08:30): 0.4% expected and 0.7% prior
CPI, May (08:30): 0.5% expected and 0.2% prior
Core CPI, May (08:30): 0.2% expected and 0.3% prior
New York Empire State Index, June (08:30): 30.5 expected and 30.2 prior
Michigan Sentiment-Prel., June (09:45): 90.8 expected and 90.2 prior
June 16
Housing Starts, May (08:30): 1950K expected and 1969K prior
Building Permits, May (08:30): 1970K expected and 2006K prior
Industrial Production, May (09:15): 0.8% expected and 0.8% prior
Capacity Utilization, May (09:15): 77.4% expected and 76.9% prior
Fed Beige Book (14:00)
June 17
Initial Claims, 06/12 (08:30): 340K expected and 352K prior
Leading Indicators, May (10:00): 0.4% expected and 0.1% prior
Philadelphia Fed, June (12:00): 25.5 expected and 23.8 prior
June 18
Current Account, Q1 (08:30): -$140.9B expected and -$127.5B prior
End part 1 of 3
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investment help
Breakout test
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