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us stock market, stock prices
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8/18/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: ROK; TDS; CLF; TUNE (hit buy late & alert hit after hours)
Trailing stops issued: None issued
Stop alerts issued: BSX, IDXC
SUMMARY:
- Start soft, finish stronger, deliver a modest follow through.
- Friday Philly Fed report gains importance as consumer and businesses seem to flip-flop.
- Quick NASDAQ follow through caps four upside sessions, sets stage for a more sustained move.
- Looking for a breather after a test of next resistance.
Bullish intraday action coupled with better overall action.
Classic action after an upside move: start soft, hold key levels, then rally back and close at the session highs. Breadth was strong and volume was up as well, further indication that the move was not just one of those weaker bounce the market has shown for the past 7 weeks. Oil was higher, oil and gas inventories were lower, but stocks did not pay much attention today. They moved through the near resistance at the 18 day EMA, paused all afternoon to regroup, then moved higher at the close. Classic upside action.
The move came on the fourth day of a rally. With NASDAQ showing a 2% gain on rising volume, there was some follow through to the move that started last Friday. Not the most powerful follow through that you see when the market is ready to really take off. Instead it is more like the May move where there was a follow through on average volume The Wednesday volume was not even average, but in late summer you take what you can get. As we are currently viewing this move as the one that sets the stage for the next test, we are not expecting massive, blowout moves across the market.
Indeed, despite the solid breadth Wednesday, there were not a lot of major breakouts. This reversal and follow through was pretty much from the new lows for 2004. SP500 and SP600 forecast the rally attempt with last week's lateral move, but that came after a nasty drop that put the indexes into a downtrend. That move tore up a bunch of stocks, and they still require some rebuilding to get rid of the recently acquired overhead supply. That is why, as well as other similar moves in history, we feel this move is one that will help stocks start to rebuild their bases. Then there is another drop in September/October where stocks either form double bottoms or handles to the current bases they are forming. That sets the stage for the real break higher that takes the indexes up to challenge the early 2004 highs.
That is a long way to go given Wednesday showed a modest follow through by one of the major indexes. It is moving according to plan, but it is still early in the game, requiring we take it one step at a time. So far not bad, but again, this was not a powerful follow through session that you would want to say 'that is it.' It could just carry stocks on up and out of the base. If it does, we will be right there with it, looking at those stocks that show the best leadership credentials.
THE ECONOMY
Is it the consumer, the businesses, or both?
Oil prices have caused a lot of concern regarding the consumer. June was a slowdown month for consumers, and that raised fears of a slowing economy. The manufacturing reports, both regional and national, however, showed a solid rebound underway from a brief slowdown.
The first business reports this month, however, showed a huge drop in the New York region manufacturing level, and other surveys of business confidence showed softening along the lines of what the consumer showed in June. At the same time the consumer appears to have made the comeback. WMT, TGT, JCP and others report a strong back to school season. Mortgage applications jumped 12% last week (6% new apps, 20% refinancing) as 30 year fixed rates hit 5.25% once again. Consumer confidence is also higher, and though we don't believe that confidence measures track consumer habits all that closely, it is simply a sign that the consumer is still ramping up.
That makes the Philly Fed survey Thursday all the more important. Investors want to see if the New York report was isolated or more general. We think it was more isolated, at least in the magnitude of the fall. Capacity utilization, production, and inventory levels have not been exactly encouraging the past month. Thus the Philly region may also show a slowdown. It needs to be significantly less than NY or else we potentially have a real problem: accelerating demand with decelerating supply. That is a recipe for inflation. We still believe businesses will continue to expand through the year end, but after that it will slow down as the tax incentives for capital investment sunset.
Oh yes, and oil.
Then there is the oil factor, one that seems intent on hitting $50/bbl just as a stock rallies when it gets in striking range of 100. There is tremendous upside momentum driven by speculation and each global story in any way related to potential impacts upon supply. As we noted in the Wednesday report regarding opening the SPR, there is nothing to stop the rise other than its own weight. Oil is due for a modest $1.50/bbl or so correction shortly, but that is not the same as breaking the speculative cycle that is driving prices higher. It is going to peak, but timing the end of speculative advances is hazardous (ask the bears shorting the market from 1995 to 1999).
If the US announced Thursday that it was immediately selling 4 million bbl that day (the SPR can produce approximately 4.3 million bbl/day), that would halt the current spike. If it went further and said it was going to do so for an indefinite period until prices came under control, it would break the back of the spike and take oil back down into the thirties. It is arguable that the problem is not supply (as Saudi argues and the Bush administration apparently buys into) but refining and/or the threat of disruption. If the US is producing from the SPR, however, that premium paid for concerns of disruption is immediately reduced. Further, it skewers the speculation in further gains as it injects uncertainty in what was a pretty sure bet for the guys in the pits.
But alas it is not being done and we see oil making an almost inexorable move to $50/bbl. Prices have already climbed $10 in a month, putting price well over that $35/bbl mark that has ushered in a recession each time it stayed over that level for several months. We are on the verge.
THE MARKET
Not too long ago four upside sessions would be considered a sustained, major rally. Judging from the comments on the financial shows, it still is. That doubt is part of what set the stage for the current rebound, though as we have noted each night, sentiment indicators have never made it to levels suggesting any sustained rally, at least not the bottom-finding, sentiment that leads to a new market breakout. Again, we are not expecting that from this move, instead looking for a solid rebound better than the late July bump higher, one that lasts 2 to 3 weeks. That sets up the next test where the sentiment really does ratchet up as investors figure the market just does not have the ability to move higher.
Not that the Wednesday move was a dog. NASDAQ rallied 2% on a solid volume increase. The indexes broke through near resistance at the 18 day EMA, all on better trade. SP500 even has the look of a more classic double bottom forming. In short, it was a follow through on the fourth day of a rally attempt, usually a good sign. It was not a powerful follow through, however, and there were not a lot of leaders blasting off. That last point is important. It tells us the market still has work to do before it can really break higher. A quick look at the index charts tell us that, but the point is that in any rally you have to have leadership ready to lead higher. There were not a lot of those big moves on big volume Wednesday on the follow through session. Not surprising as none of the indexes could muster above average volume.
After this 4 session upside move that cleared some important resistance, the market can take a pause to close out the week. That would be best for a more sustained rally on this follow through, easing back to the 18 day EMA on lower volume, then starting back up next week on some again rising trade. So far stocks are making the preliminary steps in the bigger overall picture.
Market Sentiment
VIX: 16.23; -0.79
VXN: 24.17; -1.38
VXO: 16.48; -0.71
Put/Call Ratio (CBOE): 0.98; +0.03. Still holding high levels as the market rallies. Again, that is more a result of some short covering than speculating the move is heading lower. The put/call ratio already flashed the sign a bounce was possible with its three closes above 1.0 the past three weeks.
NASDAQ
Pushed through the 18 day EMA on rising volume, delivering a follow through session to the rally that started last Friday.
Stats: +36.12 points (+2.01%) to close at 1831.37
Volume: 1.581B (+13.14%). Solid volume increase, but not so solid that it pushed above average. For a mid-August session, not that bad. If we were looking at a follow through in October with this kind of volume we would be somewhat disappointed. One thing to remember: we can see another follow through over the next few sessions that could generate big buying volume.
Up Volume: 1.376B (+305M)
Down Volume: 196M (-104M)
A/D and Hi/Lo: Advancers led 2.79 to 1. Excellent, follow through caliber breadth.
Previous Session: Advancers led 1.39 to 1
New Highs: 29 (0)
New Lows: 65 (-24)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Much better volume increase Wednesday as NASDAQ pushed through the 18 day EMA (1823), a key near term resistance level. Still has to tackle 1850, then the 50 day EMA, etc., but that is the nature of recovering from a sell off. It has managed to break the downtrend from the past 7 weeks, and now we expect it to take a rest and test that break over the next few sessions. After four days upside it will need a breather before it can add much more, but there is no definite timetable. Still looking for NASDAQ to move up toward the 50 day EMA (1884) and 1900 on this move. That is still a solid run from here, and it will need to take a bit of a breather before it makes that move. Indeed, we want it to take a breather, approaching that level in a steady, orderly manner. That allows stocks to build their bases and better sets up the next test that has a better chance of being the bottom for NASDAQ.
NASD 100 made the same move, clearing the 18 day EMA on rising though still below average volume.
S&P 500/NYSE
Last week's set up delivered this week's move, a nice break higher on rising but disappointing volume. Cleared important resistance and is heading for its next key test. After this kind of selling, there are a lot of important resistance points.
Stats: +13.46 points (+1.24%) to close at 1095.17
NYSE Volume: 1.288B (+1.6%). Volume rallied again, showing a bit more accumulation, but it was still well below average trade. It is not showing the definite long term buying, but again, in this move we want to let stocks set up their bases.
Up Volume: 1.128B (+346M)
Down Volume: 142M (-316M)
A/D and Hi/Lo: Advancers led 3.43 to 1. Excellent breadth as the small caps were a market leader (+1.8%) along with techs.
Previous Session: Advancers led 1.48 to 1
New Highs: 76 (+26)
New Lows: 15 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Blew through the 18 day EMA (1085) on stronger trade, putting that level to bed for now, and putting it in the position of acting as support on a test back after this initial surge. Strong move and already coming in range of the next resistance at the 50 day EMA (1099) and the 200 day SMA (1098). 1100 is probably where it will need to take a breather after a four day run higher. If it makes 1100 this week it deserves that rest into the weekend. That sets up the next important leg in the rally, up toward the 200 day SMA and 1125 where we want to see the index reach before it fades.
The pattern also suggests a possible double bottom as the August low undercut the May low. That keeps us looking at the pattern closely as it nears 1125: it may simply form a handle (low volume lateral and slightly lower move) as opposed to coming back for another test of the August low.
The small caps got help from the rest of the market, and t was enough to push the small caps into the number 3 leadership position for the session (+1.8%). Cleared 270 and is on the way to the 200 day SMA (277). Want to see it at the 280ish level on this move, perhaps to 285 before it runs into trouble.
DJ30
Nice move on rising but still below average volume as well. Cleared 10K with ease, sweeping toward the 50 day EMA (10,108) and the February/April down trendline (10,115). Will most likely run to the 50 day or a bit above that level and then take a breather. That will set up a move toward the 200 day SMA (10,243), a point of resistance we want it to test on this move before it turns back. 10,250 from the April and June highs would be even better.
Stats: +110.32 points (+1.11%) to close at 10083.15
Volume: 187 million shares Wednesday versus 186 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Leading economic indicators for July hit at 10ET and the Philly Fed at 12ET. The LEI has been fading the past two months, forecasting the slowing but not contracting economy. They are expected to show another down forecast of the type that shows a slowdown without a recession. Continuing high oil prices, however, could start to change that. The Philly Fed is key given the surprising weakness in the New York PMI following the strength in the regional reports in July. Given the market has rallied four sessions straight, weaker reports could cause it to take the breather we expect it to start over the next few sessions. The indexes could run up and tap toward next resistance on a continuation of this move and then ease back intraday to start the breather.
We will continue to look for upside breaks higher. Despite the lack of volumes of solid breakouts there are still stocks set up well to move from here and some will be even better if the overall market takes a breather for a couple of sessions. Wednesday we had to be very selective regarding volume. There were a lot of stocks running higher, but with overall volume remaining below average, volumes were sporadic.
We will continue to insist on good volume for upside moves and we will also be aware that after four upside sessions the market will be due for a rest. That means watching out for an early surge that hits next resistance and then stalls.
Support and Resistance
NASDAQ: Closed at 1831.37
Resistance:
1830 - 1850 (July lows) and the May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The March 2004 lows (1897 - 1989)
The 50 day EMA at 1884 is key resistance.
The 2004 down trendline at 1940
The 200 day SMA at 1975
Support:
The October 2002/March 2003 up trendline at 1824
The 18 day EMA at 1823
July 2003 highs at 1755.
Late July 2003 top at 1735.
June 2003 intraday highs at 1686 to closing range at 1644 to 1677 (mid-July low here as well).
1600.
S&P 500: Closed at 1095.17
Resistance:
1096 to 1100 represent price supports and the 50 day EMA (1101).
The 200 day SMA at 1109
The March/April down trendline at 1122
1125 was key price support.
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support:
The 18 day EMA at 1085
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
1048-1040 from September 2003
1010 - 1015 from June/July 2003
Dow: Closed at 10,083.15
Resistance:
The 50 day EMA at 10,108
The February/April down trendline at 10,115
The 200 day SMA at 10,243
Late April, June peaks at 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 18 day EMA at 9997
9783 to 9793, the August lows.
9625 - 9660 from September 2003.
9500 from various price points in late summer to fall 2003.
9250. More solid support from the June through August 2003 consolidation.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 16
NY Empire State Index, August (8:30): 12.6 actual versus 32.3 expected and 35.8 prior (revised from 36.5)
August 17
Housing Starts, July (8:30): 1978K actual versus 1900K expected and 1826K prior (revised from 1802K)
Building Permits, July (8:30): 2055K actual versus 1950K expected and 1924K prior (revised from 1945K)
CPI, July (8:30): -0.1% actual versus 0.2% expected and 0.3% prior
Core CPI, July (8:30): 0.1% actual versus 0.2% expected and 0.1% prior
Industrial Production, July (9:15): 0.4% actual versus 0.5% expected and -0.5% prior (revised from -0.3%)
Capacity Utilization, July (9:15): 77.1% actual versus 77.5% expected and 76.9% prior (revised from 77.2%)
August 19
Initial Jobless Claims, 08/14 (8:30): 335K expected and 333K prior
Leading Economic Indicators, July (10:00): -0.1% expected and -0.2% prior
Philadelphia Fed, August (12:00): 30.8 expected and 36.1 prior
End part 1 of 3
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