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us stock market, trade stock
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8/21/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: CCBI
Trailing stops issued: None issued
Stop alerts issued: None issued
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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market shows continued bullish bias, melts higher all session.
- August starts off sluggish for the economy.
- Market not yet forecasting a severe slowdown.
- Testing next key resistance already but volume remains absent.
- Now will stocks take a few days off to set up a further move?
Stocks finish week with a flourish.
No meek finish to the week as stocks reversed Thursday's day of rest and continued their more bullish ways. We would have preferred another slow session on light volume, but instead had a solid price gain on low volume. Volume was low regardless, but being an expiration Friday, the lack of trade was really notable. Low volume has been the hallmark of this rally, and that makes the move suspect. It does not, however, mean it will necessarily fail quickly. The summer rally from mid-May to June was on low volume, but stocks still managed a very nice, tradable early summer move (by the way, that was the summer rally, and as usual, it was not recognized by most). So far, this is the same type of action. It most likely will not produce the breakout from the base given its credentials, but it can set up the next test or subsequent handle to the pattern.
Ignoring the volume, stocks showed their newfound bullish bias once more, starting soft and then just rising and rising all session. A late sell off attempt never got legs. A week of higher oil prices (topped $49/bbl briefly), weaker economic data, and heavy fighting in Iraq were brushed aside (or ignored) as if yesterday's news. It was yesterday's news, but it is a continuing saga. Perhaps the market has finally had enough of the daily bad news and has priced some of it in. Kind of like a crisis no longer being a crisis once everyone gets used to the idea even though the situation has not improved. The ability to ignore bad news is another sign that the selling has been priced in for now. The market was good at ignoring news all week. It rallied past the first resistance level and Friday drifted up to the next level. If it would take a couple of days off at this level that would better set it up for the next move higher.
Thus outside volume issues the market behaved very well. Still, you cannot ignore volume or the fact that there continue to be few strong volume breakouts. Breadth was solid Friday but with such light volume the strong moves were once again few. A market needs strong leadership and volume to move higher; without the big money in accumulation mode stocks inevitably run out of gas and fall, typically hard.
We can play along with this rise, but we don't like buying into low volume upside, particularly when the indexes approach key resistance levels on low volume. Better to wait for the rest days to come and then try to pick up solid stocks as the move higher if the volume comes in. Otherwise you are buying into a low volume move that could end at any time. Without the conviction of most buyers wanting to own shares longer term, it does not take much bad news to turn the tide back to selling. We forced ourselves to be patient and not chase weak moves because we know they will fail. It is a time to be patient and not get too excited by a bunch of stocks moving higher on low volume in a rally that will still most likely produce a pretty sharp sell off. If stocks take a breather at this resistance and then blowout to the upside on volume, we will be ready because we are watching the market for the best stocks in the best patterns. We opted not to move into many positions Friday because the volume was so weak that we would most likely be buying some trouble. There will more than likely be a sharp move lower we can play as well, and then a rebound with another follow through and real leadership to buy into in Q4 for some real upside gains.
THE ECONOMY
The data continues to sag.
It was not a good week for economic data, at least from the most important side: business. That statement will upset many economic purists, but as we saw in the last recession, the consumer can stay very strong and the economy still falls into recession. That is why so many economists don't really understand the depth of the 2001 recession that really started in 2000 with the massive drops in GDP growth. We have discussed before that the supply side of the economy creates demand through new technologies and lower and lower prices for those and other technologies that make them 'gotta have' items for the consumer. Demand did not make these items appear from thin air, but entrepreneurs who saw potential and made a product that forged a new market. If the consumer fails the recession is definitely worse. If the supply side fails, however, we have a dead zone where there is a dearth of technological innovation because it does not pay to invest. That is why we continue to focus on the supply side, i.e., the business side of the economy.
Again, it was not a good week. Jobless claims continue to fall, about the only silver lining we could find. That bodes well for the August jobs report (we believe July was understated as well), but jobs are lagging. The leading data was quite disappointing though ECRI showed a 0.3 increase in its weekly index (rising mortgage apps and lower jobless claims) and a 0.1 bump in the 4-week annualized growth rate after it dipped 0.1% last week (the first decline in over a year). It is not indicating recession, but it is showing a continued slowing in the economy. In other words, an expansion at a slower pace but one that could be in trouble if oil continues to hold this high much longer.
That the expansion continues despite the slowing leading data is obviously an important point. The market has been pricing in an economic slowdown all year. Looking at the size of the correction in the indexes (less than 10% on SP500 and DJ30, 18% on NASDAQ) the market is not pricing in a recession. Think about it this way. Back in Q4 2002 things looked bad economically and globally with war brewing in Iraq. Yet there were hints of economic improvement, and the market bottomed in October and started the first leg of a strong rally to finish 2002 and then an outstanding run in 2003. The market put in the 2002 run before the economic news was clearing up. Indeed when the 2003 move started things were better but still not clear as the lead in to the Iraq war stopped a lot of business for about a month. Yet, the market was already working hard on pricing in those strong economic gains the likes of which had not been seen in 20 years. It gauged the strength of the move and rallied in advance of the economic run.
Obviously the economy cannot maintain such a pace, and even as the economy continued to expand the market started to correct, consolidating the gains and determining what the future economic growth would be. Again it was in the process of forecasting the economic growth (and thus corporate earnings) 9 months or more down the road. Again, the correction thus far has not been bear market caliber, indicating that the economic growth is still expansionary. Thus a more 'normal' 10%ish correction is normal in a continuing bull market run. Given the 8 month base that has not given back a whole lot of ground and that the economic indicators are not forecasting a bear market, it looks as if the market is telling us that it is getting close to a bottom.
Oil is still the bug in the ointment.
Once more oil is the wildcard that can potentially wreck the economic expansion. As noted last week, each time in the modern era when oil has surpassed $35/bbl for several months (in unadjusted dollars) major cutbacks in industrial production. While oil is not at all-time highs in adjusted dollars, it has been above $35/bbl for several months. For now the market is not pricing in recession, but if the test after this rally breaks down further and NASDAQ falls far below a 20% correction, the market is signaling further economic troubles than just a slowing expansion.
THE MARKET
When a market is recovering from a severe bout of selling it seems there are resistance points at every step of the way. Well, when you dig a deep hole, it takes a lot of climbing to get out. If you stumble you can fall right back down to the bottom. Thus each of these steps higher to resistance is important as is, of course, the reaction when it gets there.
The indexes tackled the first resistance (SP500 at the 18 day EMA) with aplomb, and after just a days rest they are at the next level (SP500 at the 50 day EMA). Success brings on challenges, and this modicum of success in the current rally is doing just that.
Bigger picture, this is just roughly the midpoint of the rebound we want to see. Time and distance continue to be a factor; you want enough movement upside and for long enough to allow stocks to work on their bases and better set up the next test lower that we are looking to be the one that sets the bottom. Again, that puts stocks at just the midpoint for this move, and with the next important resistance at hand, 2 to 4 days of rest would be an excellent set up for the next run higher. After hitting the tops on this run, the market then walks sideways as it did in the last three weeks of June, putting in time before it runs out of gas and makes the next test. That gives plenty of upside rebound and room to fall back down in a sharp move that tests and even quickly undercuts the prior low. Then we look for volume to come in as all of that money sitting on the sidelines starts moving into the market.
That may sound really pat, but as we have seen all year, the pat scenarios have played out in what is a more 'normal' year after the 2003 gains. Indeed, similar to early 2003 when there was concern regarding the Iraq war and the market was lower in a test of the first move off the lows and the economy was asleep ahead of Iraq hostilities, the current economy is going through a 'soft patch' and the market has made a normal correction. While the overall accumulation levels and price/volume action have not yet turned positive in this go round, we suspect they will start doing so as the upside move resumes.
Market Sentiment
As noted last week, the bulls versus bears ratio is improving, but is still far from a level indicating a bottom is near. It will most likely take another really sharp move lower just after everyone gets a bit excited that the current move might be the 'one' when it continues upside. That dive lower just when you thought it was safe to enter the water always scares the you know what out of investors and sends the last ones packing for awhile.
In addition, volatility only reached 20 on this last push before the bounce killed it off. The put/call ratio remains at high levels, but as we have seen, it can signal short term moves when it acts on its own, but longer term more significant moves require the other sentiment indicators to line up with it and with the market price/volume action as well. Definitely not there yet, and as noted, it will take another drop to do it.
VIX: 16; -0.96. The last 4 times VIX hit 14 (all this year), the market stalled and sold off. After hitting 20 on this last sell off (that was at the May high but more than 2 points below the March high) it is already back down at 16. A few more good moves and it will be at that level again, forecasting the start of the next selloff. That is where we watch the market's price/volume action to see if it is corroborating the VIX. When the selling starts we want to see the VIX shoot up toward the forties. That will be a more certain indication of sentiment reaching a level where a bottom could set.
VXN: 23.06; -0.85
VXO: 16.3; -0.97
Put/Call Ratio (CBOE): 0.95; +0.06
NASDAQ
Anemic volume as NASDAQ resumed the move over the 18 day EMA and the October 2002/March 2003 up trendline.
Stats: +18.13 points (+1%) to close at 1838.02
Volume: 1.349B (-5.07%). The Wednesday follow through volume was still below average, and the Friday expiration volume was very low, back to June levels. As noted earlier, this is not necessarily the end of the rally. May and June volume was low as the index rallied. It did not get strong until the move peaked. Thus we can see the index move toward the 50 day EMA on continued mediocre volume as there is some buying ongoing, at least more than selling.
Up Volume: 982M (+482M)
Down Volume: 351M (-558M)
A/D and Hi/Lo: Advancers led 2.61 to 1
Previous Session: Decliners led 1.52 to 1
New Highs: 41 (+3)
New Lows: 47 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After the Thursday pause NASDAQ was ready to move again on expiration. There were no sellers so the market drifted higher with its new upside bias since the rebound started. It hit 1843 on the high, just below the next resistance at 1850. That is not as strong as the 50 day EMA (1880), but with SP500 trading at its 50 day, it could be enough to make NASDAQ pause and take a longer breather before resuming the move to test that important 50 day. This low volume will eventually be the death of the rally if it does not turn sharply higher after this next rest period. Again, that is okay; this could be the bottom of the base and the start of the breakout move, but we doubt it. Sentiment indicators were not extreme, leaders were not rampant, and the follow through was pretty anemic.
Similar action in the NASDAQ 100 and QQQ as they crossed the 18 day EMA on very low volume.
S&P 500/NYSE
Would not turn back, but in the end it had to at the 50 day EMA, briefly moving past that level intraday but closing below it as it did not have the volume to make the move stick.
Stats: +7.12 points (+0.65%) to close at 1098.35
NYSE Volume: 1.196B (-4.73%). Volume has not been worth a hoot on the way up, but as with NASDAQ, it was not much in the early summer rally either. It will have to improve to get through the 50 day EMA. Or maybe not. If there are not sellers right now it could just move on up on more light trade and then run out of buyers. That is when it makes the test lower.
Up Volume: 978M (+447M)
Down Volume: 211M (-490M)
A/D and Hi/Lo: Advancers led 3.03 to 1. Excellent breadth as the small caps led the move.
Previous Session: Decliners led 1.25 to 1
New Highs: 99 (+38)
New Lows: 13 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
We wanted another day or two of testing, but the market rarely gives you exactly what you want. Instead the large cap index marched right up to the 50 day EMA on lower, below average volume. It looks as if this will be the point where it takes a breather after a very good week of gains. Looking at the May low volume rally we note that SP500 ran 40 points from the low to the first plateau. Wouldn't you know it, but SP500 has run 40 points from low to the Friday high on this move (1060 to 1100). While moves are never exact, they do have a certain symmetry. As this 40 point mark also coincides with 50 day EMA, it looks like the perfect place for SP500 to move laterally this coming week to rest and set up the next move toward the 200 day SMA (1110) and perhaps 1120-1125.
The SP600 broke through the 50 day and 200 day SMA (277, 277.24) as it moves toward some stiff resistance at 285 to 287. Still in a toppish pattern but was leading the market Friday. When SP600 and NASDAQ lead, the market moves as well.
DJ30
Blue chip volume bucked the other indexes, rising on the session though still coming in well below average. DJ30 managed to close over the 50 day EMA (10,105), but it stalled when it tapped the February/April down trendline on the session high (10,127). This is a double layer of ice it has to break through, and with the other major indexes at important resistance as well, we are looking for it to pause its ascent this week. Then we want to see it move toward the 200 day SMA (10,245) and price resistance at 10,250 as the rough level where it starts the next test.
Stats: +69.32 points (+0.69%) to close at 10110.14
Volume: 175 million shares Friday versus 162 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Friday we were looking for the market to rest another session to set up a good week ahead. Stocks decided to plunge on ahead, reaching the next resistance level on continued weak volume. Strong week last week in terms of price gains. SP500 making the same point move it made in the first leg of the May low volume move. Stocks could just keep running up, but given the strong finish to a good price week and that it was expiration Friday, we expect stocks to take that rest to start the week. It could be several days taking up most of the week. Frankly that is the better action as it helps set up the next move and prolongs this rally. Again, time and space are what we are looking for on this move to better set up the next test and the potential setting of a bottom.
Economic news comes back on the scene with durable goods orders, Q2 preliminary GDP, and final Michigan sentiment. After a week of putting its head down and finally ignoring oil prices and not worrying about economic data it may take a peek at the data. We are not expecting to be blown away by the numbers, and the market may take that as another reason to pause and take a breather.
Given a week of upside moves on light trade, this is not the optimal time to initiate a bunch of new long positions. Better to let the market take a breather and then show us what it has in terms of volume and leadership moving out of solid patterns. This week we saw many stocks in position to move, but not a lot of them moved on volume. Some did, but most others either did not advance much or moved higher on low trade. As hard as it is sometimes to sit and watch stocks move, we have to be patient and wait until they show strong buying on the move (or selling if downside). That way we can step in with confidence. The more stocks that are making good moves on volume the better as that shows money ins once again moving into stocks overall.
While that could happen after a test of the first leg on this rebound we doubt it. There are still too few stocks ready to move, the sentiment indicators were never extreme or close to extreme, and there is not a lot of accumulation ongoing in the market in general. In short, the stage is not set for a really super breakout move. We will, however, continue to track leading stocks, and if volume spikes and stocks take off, we will be ready to move into positions in those leaders. At the same time we will continue to watch downside plays set up for the move back down once this rebound runs out of gas. There should be quite a few individual stocks and indexes ready to make that play when it sets up.
End part 1 of 3
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