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us stock market, trading system
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7/03/04 Investment House Alerts Report
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IH Alert Subscribers:
Happy Fourth of July!
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: CACS; INFY
Trailing stops issued: BRCM
Stop alerts issued: SGTL; SYNA; MXIM
SUMMARY:
- Weaker jobs data sends weakened market lower, but Friday selling was less intense.
- Jobs growth slows pace for a month causes some to erroneously call an end to the expansion.
- Summer rally on the ropes but there are more than just pockets of strength.
Jobs report fails to provide market a much needed catalyst.
If investors were looking for a booming jobs report to reverse the Thursday sell off ahead of a long weekend, they did not get it. Jobs were less than half of the consensus, and a market already worrying about future economic growth thought it had another reason to worry. Stocks started low, sold lower, and the major indexes even undercut the next support level, something very familiar after the Thursday dump lower took out a few support levels itself.
Another day of losses with SOX once again leading to the downside (-2.1%) as it spirals toward the bottom of its recent trading range, now just 7 points away. Once again the chip index dragged NASDAQ lower, but with just a 0.4% loss the downside for the techs overall was not that bad. Indeed, the small and mid caps led the action again (-0.1%, -0.2%), and that kept NYSE breadth positive. In addition, volume was much lighter ahead of the weekend. Yes the selling continued, but the intensity backed off more than just a notch. Volume declined as the major indexes slightly undercut and then rallied to hold the next support. Advancers beat decliners as most stocks managed to hold support as well. The indexes finished lower but the internals point to very mild selling. Seems the hedge funds got their selling out of their system for the weekend on Thursday when the market was really shellacked.
It was easy to be gloomy Friday with all the talk of economic weakening, but we saw many stocks holding near support after a slight undercut and rebound, sitting nicely after a lower volume pullback. The chips were not in that position as they once more sought the depths of the recent trading range. Overall, however, there was more relative strength than out and out weakness Friday. The summer rally took a hard body shot Thursday, but the Friday action was more like a jab that did not make solid contact. That left many stocks in good position to bounce in relief if nothing happens over the long weekend. At this stage it would be a relief bounce unless there is very strong buying on the rebound. Right now we don't see that happening as the summer rally showed its colors when SOX hit the 200 day SMA and swan dived.
THE ECONOMY
Jobs still being produced but the pace slows in June.
All of the sudden the television is abuzz with the prospect of an economic slowdown. The market has been basing since the first of the year, and has been trying to make a breakout after a nice rally off of the mid-May low. It is struggling to make that breakaway move, struggling all year with the prospect of slower economic times compared to the 5% growth seen as the economy recovered. The market is the best handicapper of future economic growth, and it has yet to make the breakout move that signals it once again feels growth will be at a level to sustain higher stock prices. The base is good, but the market is faltering at the breakout point.
The economy has produced over 1 million jobs the past 4 months, but the 112K in June was less than half the 250K expected. Factory jobs started losing again, dropping 11K. Wages are up 2% for the year, half of expectations. There were write downs in May as well, though they were minor. We were ambivalent about making that number; the weekly claims had stopped falling and are inching higher. Still, once the economists are converted that things are improving, they predict further improvement until it ceases. They were underestimating growth for months and months, and once they converted, they could not see that the economy was hitting a slow pocket even though as we have discussed the past month the economy was doing just that. Now they are questioning if it can continue to grow at all. Reading some of the comments from economists from big banks, etc., you would think things are on the edge of meltdown. No kidding. "This economic recovery is a lot more fragile than most of us thought" grimly noted one economist who had been all lathered up about the need for rate hikes given the strong jobs growth. One slower number, and still not bad at all, and their beliefs are shaken.
That is good. Fear is good because it keeps everyone honest. It keeps excessive risk out and focuses everyone on fundamentals. That keeps things going without overheating. It is up to us to recognize what is real slowing and what is a typical slowdown. This summer is more typical than last year where the market and the economy were coming off three years of nasty decline. This year there is a lull in activity both in the economy and in the market after a strong upside binge in both.
Economy in a slow cycle within a bigger up cycle.
That implies this slowdown is not the end of the expansion. It is not. It is going through a down cycle in a growth phase. Several other economic reports, much more leading than jobs, have shown a slowdown coming. Friday was another example with factory orders down for the second straight month. They were still higher than expected, however, coming in at -0.3% versus the -0.6% expected. April was revised to a 1.1% loss from the -1.7% originally reported. Take out transportation and the May orders actually rose 0.2%. This is a similar theme: slowing, but not bad at all. A lot of this was hesitation about rising energy prices and forecasts of $50/bbl oil. That has not come to pass. Oil is going to decline into the upper twenties once the fear element deflates further. There is also a seasonal slowdown that you cannot ignore during more typical years as opposed to the recovery year of 2003.
Thus the June jobs data don't tell us there is a major slowdown coming. Indeed, the household survey saw more employment (+256K jobs) even as more people (305K) re-entered the workforce. This is consistent with the big jump in consumer confidence in June that was led in large part by a renewed confidence in finding jobs. Moreover, recruiting firms do not report any slowing in June with several saying candidates had multiple offers to choose from for the first time in years.
What we are seeing is slowdown during the early summer after a very strong 2003. The stock market suggests the slowing could continue in Q3 as stocks have been unable to deliver a breakout from the base that started in January. The market forecasts the economy, and with the Fed just embarking upon a rate hiking campaign just as the economy cools off, the aggregate of investors have not decided just how strong the growth will be, i.e., if it will be strong enough to warrant an significant appreciation in stock prices.
Fed raises as the economy cools. Now there is nothing new.
It is interesting that the Fed started raising rates just as the economy was suffering its first slowdown in the expansion. Expansions rise and fall in their intensity, cycling just like any other dynamic process, e.g., the stock market. This is the first slowdown; if conditions remain positive, it should come out of this slowdown and make another strong advance. Just as a new issue stock rallies at first and then falls into that first base and the breakout is a great time to buy, a recovering economy has that first strong surge, takes a breather, then returns to stronger growth.
The Fed, for all of its reams of studies, seems to get a bit too analytical and thus misses the bigger picture, at least with respect to historical trends. Strong recovery year in 2003, taking a breather in the first half of 2004, then picking up toward the end of the year as companies rush to take advantage of the last tax incentives that expire at year end. A 25 basis point rate hike does not work to slow the economy much given the already low rates (though it is a 25% increase in the cost of capital given the current low 1% Fed funds rate), but once again we see the Fed raising rates when the signs indicate the current economy is slowing (similar to that last 50 basis point rate hike in June of 2000). In fairness the Fed has to get rates higher for a number of reasons including the ability to make dramatic gestures in the event of national or worldwide crises, but the timing is once again curious and leads many of us to conclude again what we have concluded all along: the Fed flies by the seat of its pants just as most everyone else. It just spends millions more on paperwork, and its incorrect guesses cost us trillions.
Slower for now, picking up steam in Q4.
Again, this is a more typical slowdown in a more typical year for the economy. 2003 was a boom year and 2004 has been a necessary pullback. It is hard to grow at 6% indefinitely. What we anticipate is a pickup again in Q4 as companies really do move in to take advantage of the last year of $100K expensing and accelerated depreciation. That will cause a spurt of activity after the election, and the stock market will anticipate this increase long before the actual government reports are generated. After Q4 then the economy drops back into a 3% growth range as there will no longer be all of the business side incentives in place.
THE MARKET
After the Thursday dump lower on strong trade the June jobs report had the real chance of pinning a breakdown on the market. SOX was again in no good cheer and was leading the market lower, finishing right at its low as it heads toward 450 at the bottom of its range. The continued general semiconductor weakness put the governor on anything NASDAQ could do to the upside, but NASDAQ showed Friday it was not all chips as it managed to cut its 0.9% loss to 0.4% and held the 18 day EMA on the close. Small caps tapped the 10 day EMA on the low and then rallied back for a 0.1% loss. Similar stories on the other indexes, though it was clear that the larger caps were under more pressure than the smaller issues, a familiar theme in this market regardless of the pervasive belief that large caps are going to take over leadership. As usual, action speaks louder than words.
Volume backed off, breadth was positive, and losses were modest. Seems the selling was done ahead of the jobs report as hedge funds squared up for the long weekend. The late week action put the summer rally on the ropes for sure: NASDAQ had just broken solidly over its June high and was ready to take on April. SP500 had held on and was ready to make its breakout, sporting the best large cap pattern. That did not happen. NASDAQ turned back down into its range. SP500 never made the move despite an open door early in the week. That was a clue to a problem, and it suffered worse selling than NASDAQ as far as its pattern is concerned, falling all the way to the 50 day EMA and the bottom of its handle. That left the large caps backed into the ropes, needing to come up with some strong combinations to fight its way out.
In short, the patterns did not break down and can still deliver a breakout if the big money decides to buy back in. It could have just been a shakeout, and that can lead to explosive moves upside. As we have said all along, however, it will have to prove it given the time of year and the damage caused to the large cap indexes by the late week move. It was not so much distribution damage (high volume selling), but a loss of momentum and failure to make the move when it was there. Instead chips rolled over again and without them the market has struggled. Yet, there are other areas that are holding up quite well and did so again Friday. The market can find leadership from some of these groups, but all moves will ultimately depend upon the level of economic growth.
Is SOX/chips really important to overall market?
Certainly there are portions of the market that are holding up despite the semiconductors. The majority of the market is pulling back but it is doing so on lower volume and holding near support on the close. This is while SOX and most semiconductors are diving lower. Thus SOX is not the end all in determining whether the market rises or falls. Leadership can develop from any area. Leadership is of different quality, however. If the market has to rely on energy companies or REITS to lead the way, their growth rates won't allow much price appreciation in the market as a whole.
Importantly, up to this point, any leadership that has developed has been unable to lead to a breakout from this 6 month base. When the SOX and semiconductors in general have not performed, NASDAQ has lagged, and the market overall has not been able to break higher. Thus while medical, drug, biotechnology, financial, software or other high growth areas could lead, none of them have stepped up, and none of them have had the impact on the rest of the market the semiconductors have had when they are running higher (the May to June rally) or when they are running lower (right now). It is key that the other large cap indexes, while selling back at the end of the week, did not break down even as SOX and the other chips plunged lower. Chips are a key group. For a continued market rally they are still going to at least need to follow and stop the bleeding.
Earnings ahead: Iraq turned over, Fed has said its peace, jobs report recorded, and now earnings.
YHOO and friends start earnings this week, but the real action begins the following week. This is the lick log time for the market. It was unable to do anything with JIF (jobs, Iraq, Fed), but the indexes have held onto the pattern and as noted, can still make a run higher from here. Indeed, the early round of earnings can provide an upside catalyst before further selling. S&P 500 earnings are supposed to report record 24% growth. Typically there is a jump higher on the excitement of the first strong earnings, then the bloom wears off, the expectations are built in, and stocks then suffer a July decline. If guidance is in line with expectations, then the early excitement typically is certain to wear off. Last year that led to a dip into August before stocks took off again. This year more typical would be that pullback after first earnings are over, then range trading lower until September and October.
That is not the brightest assessment for stocks moving into the heart of summer, but as of yet, despite the rather decent bases that have formed, there has been no breakout from anyone other than the small caps and the Dow transports. The latter is good news for the DJ30; it should follow. Still, in this climate of slowing economic data and retrenchment after the 2003 run, we will have to see the move to be convinced. At some point stocks will again start pricing in the Q4 economic gains, but with economic growth slowing from a hot 5% to 6% expansion level to 3% to 4%, it has to readjust the 2003 gains. There are still many stocks managing to grow earnings and maintain good patterns, and those have to be our upside focus while at the same time we start looking at downside as well, particularly after another bounce higher on some early earnings excitement.
Market Sentiment
VIX: 15.08; -0.12
VXN: 19.89; -0.17
VXO: 15.09; +0.01
Put/Call Ratio (CBOE): 0.81; -0.12
NASDAQ
Was on the road to ruin but checked up over the 2004 downtrend and then cut its losses late and held the 18 day EMA on the close
Stats: -8.89 points (-0.44%) to close at 2006.66
Volume: 1.207B (-31.42%). No one wanted to trade ahead of the long weekend. No real selling volume, just some early downside momentum that checked up. No real distribution at all the past week though Thursday's high volume selling was a concern as it followed on an artificially high session Wednesday given quarter end. The lack of a lot of clear distribution, however, still leaves the foundation for a break to the upside. A foundation is one thing, having the buyers actually come in and build on that foundation is something else.
Up Volume: 335M (+7M)
Down Volume: 842M (-576M)
A/D and Hi/Lo: Decliners led 1.07 to 1. Very modest downside breadth all session even when NASDAQ was down almost 0.9%.
Previous Session: Decliners led 2.27 to 1
New Highs: 61 (-32)
New Lows: 50 (+11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Managed to recover off of a tap below 2000 (1996 on the low) and close above the 18 day EMA (2005). Not a great session, but that late bounce showed some life still in the pattern following the failure of the Tuesday and Wednesday break above the early June high (2024). Bigger picture, NASDAQ managed to hold its 5.5 month double bottom w/handle base, but it faded back into the handle. At least volume was lower and it is holding in the upper half of the handle over some key support at the 18 day and 2000 level. Just below that is the 50 day EMA (1989) that is now coincident with the 2004 down trendline. If SOX presses on down to 450 we could see NASDAQ make another test lower toward the 50 day EMA. From there we get a relief bounce on the early earnings, provided they are strong. We doubt that will produce a breakout, and once that attempt is over then there is the potential for more downside that we will want to take advantage of.
QQQ/NDX took a bit worse percentage beating than the overall NASDAQ, but they too managed to hold at the 18 day EMA and their reverse head and shoulders patterns. This is where they need to make a stand, however, and rebound to produce a breakout that holds. Otherwise it does not look good for the large cap techs. Note that Wednesday QQQ rallied over the April highs on rising though below average volume. It immediately gave up that move Thursday on much stronger, above average volume. Yes quarter end reshuffling played a roll, but you cannot ignore the higher volume reversal of the breakout.
S&P 500/NYSE
Managed to hold at the 50 day EMA on the close, right at the bottom of its handle range after it failed to take advantage of a red carpet opportunity to breakout to the upside. That failure to act was as instructive as a breakout would have been.
Stats: -3.56 points (-0.32%) to close at 1125.38
NYSE Volume: 1.083B (-27.38%). Volume faded on NYSE as well as investors took the day off after the hedge funds and mutual funds used the session following quarter end to sell what they bought the day before. Two distribution sessions in the past 6 sessions on the S&P, another indication of the weakness that was manifest in its inability to take advantage of its position and make the breakout.
Up Volume: 414M (+100M)
Down Volume: 658M (-502M)
A/D and Hi/Lo: Advancers led 1.83 to 1. While the large caps languished, the small and mid-caps again provided the backbone to the NYSE and thus advancing issues led the way. SP600 tapped its 10 day EMA on the low and then rebounded for a nominal loss after just hitting a new high.
Previous Session: Decliners led 1.35 to 1
New Highs: 130 (-44)
New Lows: 41 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Hanging onto the 50 day EMA (1125) as well as price support at that level, trying to maintain the 4 month double bottom with handle base. It has traded down to the low end of the handle range, leaving itself at a do or die position after failing to take advantage of the breakout opportunity early last week. No breakdown yet, but it is back below the 2004 down trendline (1130), another sign of weakness in addition to shrinking from the breakout. SP500 was one of the stalwart indexes moving into the week, looking ready to beak higher. It has abdicated that role and is now trying to hang on.
SP600 (small cap) hit a new high Wednesday but gave it back in the Thursday selling. Friday it tapped the 10 day EMA on the low and rebounded for a fractional loss. Very strong as it exerts leadership as the large caps start to give it up at least near term.
DJ30
Similar to SP500, DJ30 gave up the 2004 down trendline (10,300). It went a step further and undercut the 50 day EMA (10,306) on the close though it did hold the simple 50 day (10,253). Low volume on the selling means it could hop right back up, but once again it is back below the trendline and it needs to hold here and recover the trendline. Once again DJ30 is following the other large cap indexes.
Stats: -51.33 points (-0.5%) to close at 10282.83
Volume: 147 million shares Friday versus 235 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
End part 1 of 3
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us stock market
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