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world stock market, wise stock trade
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6/17/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: HYSL; SYNA; ONXX (bonus)
Trailing stops issued: None issued
Stop alerts issued: ARTI; EGLS; BIIB; SEMI
SUMMARY:
- Market a punching bag for world events.
- Leading indicators jump, manufacturing still surging, producer prices not making it to the consumer.
- A market divided goes nowhere, at least for awhile.
At every turn the market finds a pothole.
Bombings targeting Iraq's oil transportation, an explosion of new car bombings in Iraq, resulting rising oil prices, continuing warnings of impending terror events, and the usual muck and finger pointing associated with a national election have hemmed in the market the past three weeks. After rebounding off the May low and then showing signs it was ready to break above the 2004 down trendline, SP500 and NASDAQ have stalled in a morass of uncertainty that, in all probability, investors knew was coming even as they bought into stocks off of that May low. As June 30 approaches with the Iraq handover, the Fed's first rate hike, and the beginning of earnings, however, a definite chilling of the feet has occurred and the market has stalled at the downtrend.
That the market is able to hold up at all is somewhat impressive. Open the paper one morning and see a car bombing. Turn on the news that night and see the northern oil pipeline burning. Wake up the next morning and the southern pipeline is burning. Iran sends more suicide bombers to Iraq. Claims the economy is the worst since the Great Depression. Claims the economy is growing at its best rates since the last big boom. You get the picture. The cumulative effect has stalled the current market as it waits to exhale.
Not that money is not there. Household wealth is at its all-time high, and even as the market grinds sideways more money is flowing into equity mutual funds. As the volume has shown us the past six weeks, however, the money is not being put to work in large quantities. The funds that control the billions in the market are quietly buying shares here and there, but overall they are sitting it out in this shooting gallery of uncertainty.
Stocks typically start to price in the next plateau of certainty well before the actual event. With the market still in limbo here as it stalls while attempting to continue its summer rally, it is either telling us that certainty is much further off than we would like to think (certainly Iraq is not going to be settled as of June 30) or there are other factors at work. June expiration is Friday, and the SP500 and Russell rebalance have caused necessary repositioning of funds within the market. Perhaps when these near term issues are squared money will come into the market.
In any event, regardless of the cause, the indexes have to show a definite break through the down trendlines in the near future. Again, the fact that they have held up at all shows some underlying interest in stocks, and the action in SP500, DJ30, SP400, SP600 still looks like a build up toward a continued upside move that started in mid-May. The problem is the gaping hole caused by SOX that is starting to cause NASDAQ and QQQ to take on water.
THE ECONOMY
May producer prices post strongest rise since March 2003.
Prices climbed 0.8%, 5% year over year. That was the biggest yearly gain since December 1990. The core (less food and energy) rose 0.3%, much tamer and basically in line. Year over year the core rose 1.7%, topping the 1.5% rise from the prior reported month. That suggests some continued inflation in producer prices, but not massive. It is clear form examining a long term chart of commodity prices that commodities are posting gains not seen in decades. Even during the boom in the late 1990's when the Fed was in a lather to raise rates, commodities prices were declining. That is a key difference this expansion, and with China growing at 7% GDP, it is no wonder commodities are rising in prices.
Again, the real key is whether those prices are passed along to consumers. Inflation is certainly a fear for any economy, but you have to treat the cause. Too many economists and college students are taught to recognize the symptoms of inflation, i.e., too many dollars chasing the same or fewer goods, as opposed to what causes that situation. Constraints on supply is the cause. The focus of monetary and fiscal policy should be on removing barriers to supply. If that is done, demand takes care of itself. In other words, supply creates its own demand.
Now economics professors in our fine institutions will fall over at the thought, but we have a bad habit of looking at history and the big picture as opposed to laboratory experiments and hypothetical models that reflect the biases of the researcher. History has too many variables for the models to consider, thus the most accurate source is actual history. And lo and behold, history shows a repeating pattern: the biggest booms come when supply side incentives are increased and supply surges.
Supply does create its own demand.
We all know this is the case, but just don't recognize it. When incentives are created to invest in your business, that unleashes the power of the US economy. Money pours in that has been locked up in tax shelters and other hedges against wealth. That money is used for research and development. New technologies spring up as a result. New 'Flash Gordon' products appear on the market, products we never knew we needed. We could get along without them; indeed, most people do because at first the prices are high as supply is low. Not many people buy them because they can do without them given the price. With more supply coming online, however, prices drop. All of the sudden lower price points create a market. Someone who did not want a computer that cost $2000 wants a computer that is well below $1000. Someone that hates a dot matrix printer will buy a laser printer that costs $100 as opposed to $1000. A big screen TV for $500 is immediately in demand where it was not at $2000. The same thing is happening right now in big HD televisions. There is a market and there is demand to be sure, but the demand really rises when supply rises to where prices fall.
So, supply created demand in two ways. First, supply incentives create investment the leads to new products that did not exist and that no marketing survey would have come up with as being a demand for. Second, when supply reaches a point where it creates low price points, entire new levels of demand arise. If supply was hemmed in by regulation or other impediments after personal computers were developed such that pricing remained high, the demand would never have arisen; they would have been toys for the rich. Given the pro-business climate that spawned the development of the PC in the 1980's, the PC is found everywhere today. The boom of the 1980's and 1990's saw no inflation even with the massive stocks market and GDP gains and the tremendous government spending.
In summary, if we want to avoid inflation and still have a boom, focus on freeing up impediments to supply. Right now that means insuring that current incentives remain in place and put in place more incentives such as tax free personal savings and spending accounts. That would unleash billions more into the economy and help supply and alleviate the near term demand issues we see popping up.
LEI surges 0.5% on rising jobs.
The leading indicators forecast economic activity 3 to 6 months down the road. May was forecast at 0.4% but came in at 0.5%, a big jump from the 0.1% in April. Once again we are seeing upside surprises. Once again that shows that the expansion is still being underestimated.
This basket of indicators looks at 10 items, and it is less accurate than the ECRI that comes out every Friday. It is still quite useful as its history tracks pretty well with actual economic performance. It was helped by increasing manufacturing hours and real money supply versus being offset by stock prices and consumer expectations. All in all, another positive outlook over the next half year.
That is basically the consensus anyway. The real key is into 2005. We will see where ECRI comes out on Friday and whether it shows yet another decline as it has the past six weeks. That is looking beyond 2004 and into 2005. That is where we feel the slowdown is taking root, and the market looks beyond 6 months.
THE MARKET
The market action was not bad Wednesday if you take out SOX (-3.4%) and NASDAQ (-0.7%). But there we go, sounding like a government report. Other than those indexes, the rest of the market still looks ready to make a break through the downtrend and continue the summer move. Problem is, SOX is taking on a lot of water. It is at some support at 450 but is continuing to languish below the 200 day SMA, heading in the opposite direction the rest of the market wants to go. In doing so, it is dragging NASDAQ lower, back to the late May range as it turned back this bounce without challenging the 2004 downtrend. Even QQQ was wounded by SOX, gapping lower and selling 0.9%, worth than NASDAQ. It is still holding above its downtrend, but it is obviously impacted by INTC breaking the 50 day EMA and other sluggish large cap semiconductor stocks.
With clear divergences developing, breaking out above the downtrends becomes all the more difficult. We hear analysts saying that the decline in the semiconductors is over, but the chart does not suggest that; it points to an ongoing basing process, and SOX is at a point where it has to hold up or it is heading lower. NASDAQ is being stymied by SOX, and if it breaks here it falls back to 1900 and would have then established a descending triangle, a bearish pattern that could produce further downside.
Those are the scenarios if there is a breakdown. As noted, everything but SOX still looks ready to continue higher. NASDAQ is holding up well given the major anchor chain in the form of SOX. We don't want to put rose colored glasses on to view the chart. Three distribution days in the past week is not a good sign. It made a lower high without testing the trendline. It is still in position to rebound and continue the move higher, however, and the performance of the other indexes is a compelling counter to a near term breakdown.
Market Sentiment
VIX: 15.15; +0.36
VXN: 21.33; +0.94
VXO: 15.04; +0.38
Put/Call Ratio (CBOE): 0.79; +0.10. The relatively light put trade given the gyration in the market was itself interesting, particularly given expiration on Friday.
NASDAQ
Tapped the 50 day MA on the low and cut some losses, but suffered another distribution session as SOX weighed heavily on its performance. That it was able to recover from its lows was surprising.
Stats: -14.56 points (-0.73%) to close at 1983.67
Volume: 1.486B (+9.4%). Third distribution session in the last 6. That is not a good sign for the overall index as distribution erodes the buying that brought the index off the May low to the current level. There has been a good day of accumulation mixed within that time, and the distribution is still on low volume. It has us on edge as it moves forward.
Up Volume: 417M (-210M)
Down Volume: 1.049B (+341M)
A/D and Hi/Lo: Decliners led 1.5 to 1
Previous Session: Advancers led 1.19 to 1
New Highs: 60 (-7)
New Lows: 43 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tapped the 50 day EMA (1976) on the low and managed to cut losses by a third. Volume was up again as NASDAQ failed in the last bounce to take on the 2004 down trendline (2004), making a lower high yet again. It is not showing strength, not breaking down, just working laterally over support at the 50 day EMA and the 200 day SMA (1970) that is rising to meet it. Its problem is SOX; the chips need to rebound to help NASDAQ take out the trendline. Beyond that, SOX will have to continue to build or eventually its drag at a minimum puts a cap on NASDAQ's ability to climb.
QQQ undercut its 2004 down trendline (36.30) on the low but rebounded to hold above that level. As with NASDAQ, QQQ was pulled lower by the semiconductor thrashing. It is holding up, but semiconductors will have to improve for it to continue its early summer move.
S&P 500/NYSE
Sold off close to 1125 support, held, and rebounded to close basically flat on rising volume. That is not bad action. Again, without the SOX and NASDAQ action, this looks good.
Stats: -1.51 points (-0.13%) to close at 1132.05
NYSE Volume: 1.296B (+11.19%). Volume rose as SP500 tapped at key support and rebounded. SP600 posted a modest gain on the volume. It was not clearly indicative of any distribution on the part of these stocks.
Up Volume: 702M (+71M)
Down Volume: 552M (+41M)
A/D and Hi/Lo: Advancers led 1.38 to 1. Despite mixed closes by several indexes made up of NYSE stocks, breadth was positive.
Previous Session: Advancers led 1.18 to 1
New Highs: 130 (+34)
New Lows: 40 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped at 1125 and the 18 day EMA (1124) on the low and rebounded to recoup nearly all of its losses. Volume rose on the session, but with the rebound it was not necessarily a negative indication: when an index dips but then rallies back on strong volume, that shows buyers stepped in to buy stocks on the dip. That the dip tested key support at 1125 is another indication of support buying, and that shows investors still willing to step in at important levels to get stocks a bit cheaper. It remains below the 2004 down trendline (still near 1135), the key level it has to take out, but the overall pattern is still solid for an upside break over resistance that will continue the early summer rally.
DJ30
Volume was up as the blue chips tapped the 10 day EMA (10,337) and the 2004 down trendline on the low and then rebounded to close just off flat. Similar to SP500 this action at support shows that buyers stepped in at what they felt was an opportune time to pick up shares at a relative value. This continues the lateral move over the down trendline in a relatively narrow range on mostly lower volume. This works to shake out the last sellers. Further, the rising volume Tuesday and Thursday were in conjunction with upside moves (a reversal move Thursday), a further indication of some healthy action during this lateral test. The 10 day EMA helped trigger a rebound Thursday. Now we see if DJ30, hampered by INTC falling below its 50 day EMA and still rebounding, can put together a continued upside move after taking out the down trendline two weeks back.
Stats: -2.06 points (-0.02%) to close at 10377.52
Volume: 170 million shares Thursday versus 153 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Option expiration Friday, but in recent months that has not meant a lot movement wise or volume wise. With continued uncertainty regarding oil supplies, kidnappings, bombings, etc., we might see yet another quiet session to close the week with bigger money unwilling to commit just yet. We would not be surprised, however, to see another upside attempt after the Friday expiration is over.
Thursday we watched stocks that were holding up well all session drop off sharply toward the close as some sell programs hit. As many continued holding support and as it was right before expiration and the volatility that entails we opted to let them rebound. As noted above, stocks have been punching bags, showing volatility, but in most instances still managing to hold support as the market tries to set up for another move higher in the bounce from the May low.
We are thus anticipating a pretty quiet session Friday that most likely will not produce a move outside of the recent range. We could see the same action as Thursday, i.e., up and down within the range as expiration closes and hedge funds jockey for position heading into the weekend. Bigger picture, while we are concerned about NASDAQ's ability to hold up and provide a breakout without the help of SOX, the rest of the market looks solid to continue the move higher. We still expect it to make a break higher to continue this bounce after expiration is over. It may not get much further when it does, but a test of the April highs or slightly beyond helps put a bit more into our pocket. After that midsummer to September may be more typical with a general pullback to set up a move into the election.
Support and Resistance
NASDAQ: Closed at 1983.67
Resistance: 2000 is the top of the late 2003 base. 2004 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 and 50 day EMA (1976). The 200 day SMA (1970). 1900 to 1890. The April lows (1880, 1878).
S&P 500: Closed at 1132.05
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: The 10 day EMA (1129). 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 (1093).
Dow: Closed at 10,377.52
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 10 day EMA (10,327) held on the low Monday. The 50 day SMA and EMA (10,260). Price support at 10,250. The 200 day SMA (10,122). 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
Business Inventories, Apr (08:30): 0.5% actual, 0.4% expected and 0.7% prior
CPI, May (08:30): 0.6% actual, 0.5% expected and 0.2% prior
Core CPI, May (08:30): 0.2% actual, 0.2% expected and 0.3% prior
New York Empire State Index, June (08:30): 30.2 actual, 30.5 expected and 30.2 prior
Michigan Sentiment-Prel., June (09:45): 95.2 actual, 90.8 expected and 90.2 prior
June 16
Housing Starts, May (08:30): -0.7% (1967K) actual, 1950K expected and 1981K prior (revised from 1969K).
Building Permits, May (08:30): 2077K actual, 1970K expected and 2006K prior
Industrial Production, May (09:15): 1.1% actual, 0.8% expected and 0.8% prior
Capacity Utilization, May (09:15): 77.8% actual, 77.4% expected and 77.1% prior (revised from 76.9%)
Fed Beige Book (14:00): Signs of strength continue to build throughout the economy.
June 17
Initial Claims, 06/12 (08:30): 336K actual, 340K expected and 351K prior
Leading Indicators, May (10:00): 0.5% actual, 0.4% expected and 0.1% prior
Philadelphia Fed, June (12:00): 28.9 actual, 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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world stock market
wise stock trade
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