|
|
world stock market, us stock market
* * * *
6/15/04 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: JILL; AMMD
Trailing stop alerts: None issued
Stop alerts: KNSY; LSCP
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/alertdly.htm
SUMMARY:
- Market relieved by tame core CPI, rallies support but cannot hold break over resistance.
- Consumer prices viewed as tame enough, market rallies on tamer Fed.
- Volume reverses, increases on up session as some solid stocks breakout.
- Subscriber Questions
Strong surge on CPI relief, disappointing close helped by rumor mongers.
An in line core CPI received a welcome it never dreamed, jumping futures and the market higher on the open. NASDAQ cleared 2000 and SP500 broke over the 2004 down trendline at lunch, enjoying some volume running ahead of recent levels, a good indication that more big money investors were moving in. Nice break higher, and with a successful test of the break through that level the indexes would be well positioned for a run at the April highs.
The market did make the test, but then quite rapidly broke back below that resistance and further in a steep decline that had the look of a program sell. Volume actually backed off as the pullback occurred, however, indicating there was no dumping. Floor traders told us that bids simply dried up as opposed to heavy selling. We then learned that a rumor had hit the street that Manhattan was supposedly the target of some terror event and that buildings were being evacuated. That is what caused the cancelled bids and thus the decline on falling volume.
With a about a half hour to go the rumor was authoritatively denied. Stocks started to rebound but they had lost momentum. NASDAQ ran back close to 2000 on the close but investors were not ready to jump back in again. The indexes drifted higher but could not retake the resistance. It seems pretty clear this was just another day on the street when there is overall low volume: the market was rallying through resistance on some stronger though still below average trade. The shorts put out the rumor to try and truncate the move. The light volume helps in these instances as it does not take much to stall a move. It worked for the day, but the indexes still look in good shape with the higher volume rebound off support to take on that resistance and move toward the April highs again.
THE ECONOMY
Core CPI grows 0.2%, calming fears of prices being passed to consumer.
It appears investors were indeed worried about the Fed's rate hike campaign to come. After posting a reversal rally, follow through and then break higher two Mondays back, the market gave it all back on the heels of a lot of FOMC speeches the market interpreted as the Fed reverting back to its gun slinging days of the 1984 and the late 1990's. It is, after all, the same Fed given that Greenspan was a key player during those times and now, so, as we have noted, the fear had some real basis.
Overall consumer prices rose 0.6% in May, stronger than the 0.5% expected, driven by those higher energy costs. The market did not shrink from the number. Indeed, with core prices (less food and energy) in line at 0.2% the market exhaled deeply and futures jumped. The fear was a higher core than expected that would show that producer prices were being passed on to consumers. Once again, another expansion that was initiated by supply side incentives is thus far able to avoid pricing pressure at the consumer level.
The bond market surged. A 32% chance of an additional 25 basis points at the June FOMC meeting (50 basis points total) plunged to 12% on the news and closed at a 10% chance as bonds rallied sharply on the news. The August contract has priced in a 100% certainty of 75 basis points by that meeting, i.e., that the cumulative rate hikes at the end of that meeting would be 75 basis points. That fell to 80% on the news, not a huge drop, but in the world of Fed funds futures it was a big move so far out from the actual meeting.
The immediate reaction in stocks and treasuries was positive as the large short interests in bonds were unwound some on the news. The soft core prices also helped stocks surge on the open in relief after worries regarding the Fed ratcheted up over the long weekend with those Wyatt Earp comments from FOMC members. Greenspan's testimony before the Senate regarding his nomination for another term further mitigated investor fears as he views inflation "not likely to be a serious concern." We are still concerned that supply has not been able to catch up to demand. The economy did not start to expand until the supply side came to life after the incentives to do so were in place, but it was on the floor for so long after a very steep drop off that companies have remained reluctant to really increase production capability and actual production to meet that demand.
That continues the threat that higher producer prices will at some point find consumers' wallets. The Fed has only one tool to combat this: raising rates to slow demand and thus the pressure on prices. We call this the chemotherapy method of treating inflation: you have to make the entire economy sick in order to hopefully come out on the other side well. As history shows, that is no certainty. Would it not be better to use a great cancer drug to treat the ills, one that targets the cause of the problem as opposed to the entire economy, leaving the economy strong and vibrant? That is what supply side benefits do for the economy: they increase the supply to satisfy demand. Thus even if you have more dollars in the economy, you have more goods and services to meet that demand. The economy can grow without inflation if policymakers do not impose artificial restraints that create the very imbalances the Fed fears. For some reason this lesson has not been completely learned by our leaders even though the biggest expansions in history, ones that were not accompanied by inflation, sprang from periods of tax reductions, investment incentives, and less regulation. Those benefits not only impact the economy, but the rest of society as well as crime rates drop, philanthropy increases, longevity increases, etc.
April business inventories rise 0.5%, ahead of 0.4% expected.
April inventories were down from March, but they continued to expand at a moderate pace unlike wholesale inventories during the same period. The raw materials continue to be a problem for pricing as lumber, cement, and energy are sucked into the expanding economies around the world. Hard to argue with that; strong world economies tend to have the same beneficial effects for the world as a strong US economy has for the US.
While this inventory build may look to be due to increased production, reality in the commodities and raw materials markets suggest production is not the only reason. Manufacturers are buying and stockpiling materials in anticipation of continued demand for finished goods because materials are harder to come by. When you need them you may not be able to get what you want and you may have to pay more. So, they are buying lumber, etc. and stockpiling some of it for their future use. Thus the rise in business inventories even as wholesale inventories shrank during the same period. The CPI showed that these extra costs (storing takes up productive space) above and beyond rising prices are not being passed along yet. If we want to see them do so, curtail incentives and add more regulation.
Preliminary Michigan sentiment surges.
We thought about leaving this off entirely given that only 200 or so responses make up this preliminary report. Indeed, it often has to be significantly revised by the final reading in a few weeks. For what it is worth, however, sentiment, despite the Iraq, terror, election and other worries, rallied to 95.2 versus the 90.8 expected and 90.2 May final reading. While consumer actions never really reflect sentiment polls until they really plunge. At 95.2, they are nowhere near that level.
THE MARKET
After the smoke cleared Monday we still believe the indexes were going to try again at resistance and the April highs. We also felt it would take another test of support to set the stage. The core CPI and the enthusiasm that followed pre-empted a further test, sending stocks higher from the open. The small caps were leading the charge, rallying better than 2% on the highs, followed by NASDAQ, SOX, and the mid-caps. The exact opposite of Monday when the large caps were the relative leaders though the entire market took it on the chin. That has been the pattern for advances and declines.
Turn on any financial station, pick up any financial rag, and you will see a recommendation to move into large caps and out of small caps. Yet, the market only rallies when the small caps participate. The small caps regained their down trendline Tuesday, taking back more than they gave up Monday. The market moved with these stocks. Volume increased with the move into these stocks. Not a blowout, complete character change in trade, but the strongest trade this month, and easily topping the recent downside volume that showed some distribution. DJ30 volume took off as MSFT further surged past its 200 day SMA. This action showed a nice measure of balance in the gains, but again the market only really moved when the smaller caps were involved. To us that indicates the small caps are hardly dead in this market after years of lagging.
NASDAQ and SP500 gave up their breaks over resistance by the close, but that was not the case for the other indexes, nor was it the case for a nice group of leadership stocks. There were some strong moves in many stocks that held up during the recent selling, ignoring the overall market gyrations as they stuck to their base building. With overall volume climbing and showing some palpable accumulation once again, these stocks were breaking higher on very nice trade. That is about the best barometer of a solid break higher, shoulder to shoulder with rising overall volume.
Even though NASDAQ and SP500 could not hold their breaks over key resistance levels, they closed in good position to make that move as this volume break higher continues. Without a doubt that will be a critical move for the overall market to continue its advance toward the April highs.
Market Sentiment
VIX: 15.05; -1.02
VXN: 20.88; -1.36
VXO: 15; -1.15
Put/Call Ratio (CBOE): 0.78; -0.54. After a big spike higher Monday, the market bounced. The overall ratio hit 0.94 that session, helping trigger the Tuesday rebound from support.
NASDAQ
Cleared 2000 on the high but never really threatened the 2004 down trendline and was unable to hold 2000. Volume was the strongest of the month, a better indication.
Stats: +25.61 points (+1.3%) to close at 1995.6
Volume: 1.535B (+9.15%). Best volume of the month but still well below average. It was not seminal volume turning point, unfortunately because volume was still very low. It was a positive development, however, in light of the 2 recent mild distribution days during the recent pullback.
Up Volume: 1.206B (+865M)
Down Volume: 309M (-738M)
A/D and Hi/Lo: Advancers led 2.11 to 1. Solid but well off the highs that saw advancers ahead of decliners by better than 3 to 1 mid-session.
Previous Session: Decliners led 2.86 to 1
New Highs: 56 (+12)
New Lows: 39 (-21)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ hit 2006.58 on the high, over resistance at 2000 and approaching the January/April down trendline at 2007. In isolation the move was solid but did not change much for the index: it was a turn in the right direction, a higher volume jump off of key support at the 200 day SMA (1968.74). It still has to break and hold that down trendline to have any realistic chance at the April high (2080). It made a start and is in better position to make the move, though holding 2000 would have been a big step.
QQQ gave back its high as well (36.99), but it too showed rising though still below average trade. QQQ is in better shape than overall NASDAQ as the large cap techs outperform smaller cap issues. Remains in good shape for a run at the April high at 37.50.
S&P 500/NYSE
Cracked over the 2004 down trendline on the high but could not hold the gain. Volume was substantially stronger, indicating another shot at that resistance is ahead.
Stats: +6.72 points (+0.6%) to close at 1132.01
NYSE Volume: 1.345B (+14.06%). Easily the best volume of the month, a very good sign after two distribution sessions over the prior three sessions. Still below average, but starting a nice expansion to the upside that is needed for it to clear the down trendline.
Up Volume: 1.043B (+880M)
Down Volume: 286M (-710M)
A/D and Hi/Lo: Advancers led 3.44 to 1. Advancing issues led 5 to 1 during the run to the highs. Good response to the extreme levels hit Monday.
Previous Session: Decliners led 5.09 to 1
New Highs: 85 (+44)
New Lows: 31 (-22)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps rallied to the down trendline (1135) early and then moved laterally below that level for almost two hours before breaking to 1137 on the high. After fading mid-afternoon they were unable to recover that key level on the close. Volume expanded nicely, and though the breakout over the down trendline failed, the expanding upside trade bodes well for another run at that level that is successful.
DJ30
Volume jumped above average as MSFT and BA surged on very strong trade while others such as XOM and IP posted solid, above average volume. DJ30 closed off of its intraday high as well (10,428), but it is over the 2004 down trendline (10,335) and has a nice handle formed to its move off the May low (9900). Looks ready to make a more serious move toward the aril high (10,570).
Stats: +45.7 points (+0.44%) to close at 10380.43
Volume: 223 million shares Tuesday versus 166 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Wednesday's industrial production and capacity utilization results most likely won't have the impact of the CPI report. Fortunately, if the move and rising volume exhibited Tuesday are for real, the market should not need another catalyst as the buyers got what they needed from the key news.
The late pullback was a concern, but it was also at least in part related to the rumor mill in a direct attempt to slow the Tuesday move. Indeed, given the market pulled back from its very strong moves that put it at the intraday highs, there is less likelihood of an opening round pullback Wednesday. It may still show some softness on the ORCL earnings that beat by a penny and matched on revenues; ORCL was down after hours on the report. Still, we anticipate that NASDAQ and SP500 in particular will make another run at the down trendlines and successfully move past them on the way to the April highs. QQQ and DJ30 are already primed to make the move, and with the small caps starting higher as well, the upside strength necessary for the move is present. The market just needs some more volume follow through to help it through that near term resistance. With earnings guidance coming in higher, an additional catalyst is helping.
Support and Resistance
NASDAQ: Closed at 1996.60
Resistance: 2000 is the top of the late 2003 base. 2008 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 50 day SMA (1979) and the 50 day EMA (1975). The 200 day SMA (1969). 1900 to 1890. The April lows (1880, 1878).
S&P 500: Closed at 1132.01
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 (1119). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1092).
Dow: Closed at 10,380.43
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 (10,335). The 50 day SMA (10,266). Price support at 10,250. The 50 day EMA (10,252). The 200 day SMA (10,112). March low (10,007). 9900-9850.
SUBSCRIBER QUESTIONS
Q: have been a member for several months. I don't have enough money to invest in each and every play that is listed in the daily reports. How can I improve my return when I have to be selective in what I am able to invest in? Thanks for all the insightful information your report gives me. It has taught me so much!!
A: We cover a lot of stocks because we know that even stocks that look solid won't all make the move. As we believe in making a stock show us it is worth our money by making a strong move past resistance, there are plays that will not meet our buy criteria despite looking solid; it just depends on whether the big money finishes the buy. Another important reason we cover many plays is so you can pick a few plays that you personally feel best about or that match your investment preferences. We like all the plays that we put on the report, but realize that some of our preferences among them will be different from those of other investors, so we try to present a wide range of sectors and types of plays to fit various investing styles. Price is a consideration, too, since some of the stocks can be more expensive than others. There are also sector preferences.
Our suggestion then is to decided ahead of time the number of plays that you feel comfortable playing (this could be as few as 3-5 stocks). Juggling too many plays can be difficult, and spreading yourself thin can deplete your resources, so keep your list short and focused on the kinds of plays that you like. Invest in those when they look ready to make a move, and keep them open as long as they keep performing for you. At the same time there will be other plays that look good too, and you might want to run with one of those, but try not to be impulsive. If your other stocks are still working well, it might be best to pass up another good-looking play for the time being there will be plenty more great plays to choose from down the line.
Another way to handle positions is to make partial investments in a position. Instead of investing fully an amount you've allocated for a play (unless it's going to be a short play and you want to capture a quick, specific move), take a third or up to one-half of a position and see how the stock performs. If you have a few that look good, do the same for all of them (maybe up to about three plays). If one happens to outperform the others, closing one or more of the others and investing in the one play when it shows another good entry point (as on a pullback or a break over the next resistance on strong volume, etc.) can allow you to focus your assets on the stocks with the best moves. You are taking a basket of some solid stocks and letting them show you which will be the leader, a process that allows you to focus your assets and thus improving your rate of success.
Of course, when one of your winners starts to top, when it begins to show that the move is over by a blow-off top, a double top, or it breaks below major support like an up trend line, it's time to take money off the table. Don't hang onto moves that have tired out. Sometimes you might want to take all the money out of a position, or you might want to gradually pull out just like you gradually moved into a position as described above. The stock might pick back up again, so in that case wait for a good entry point to get back in.
End part 1 of 3
|
world stock market
us stock market
|
