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money investment, financial investment
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8/25/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: GENZ; BGC; ZBRA; RIMM; DUSA
Trailing stops issued: None issued
Stop alerts issued: CKFR
SUMMARY:
- Stocks get tired of waiting, rally higher but on continued low volume.
- Oil hits 2 week low, durables surge on airplane orders.
- Low volume breaks past resistance frustrating, but in line with bigger picture.
- Close eye on VIX and next key resistance.
Stocks get impatient, continue rally on slightly better volume.
Two days of rest is better than none, and with oil dropping to two week lows (below $44/bbl, over $5 off its recent high) stocks just could not wait any longer. After a choppy morning they tested close to near resistance and then rallied the rest of the session, moving through the next key resistance and closing near session highs.
There was a lot of talk on the financial stations about the lack of sellers Wednesday, but they were a couple of days late in that discussion. The lack of selling was on Monday and Tuesday when the indexes stalled at key resistance levels. If there was ever a chance for sellers to jump in, that was it. Wednesday volume was higher. Not blowout, but the highest volume since last week when stocks were making their first move in the rally. Volume is certainly not blowout and certainly not the caliber you want to show a bottom has been hit, but the price/volume action has definitely turned positive, i.e., up on up sessions and down on down sessions. That indicates the start of accumulation that has been missing in this market, and that is one of the key ingredients to an ultimate breakout.
In sum the market continued its bullish bias, ignoring the Russian jetliners crashing and new home sales dropping to post a solid price gain on rising volume. There were continued upside moves, some on good volume. No blowout, no major breakthrough, just a continuation of the rally to better set up the next test that we view as bottoming the base.
THE ECONOMY
Oil hits two week low even as US inventories fall.
It would only take a 4 week low to push oil back below the $40/bbl mark. That is how fast oil has risen on speculation the past month. It has temporarily peaked as the Iraq pipelines are back up and running and Russia says it will expand production. This even with the Bush administration reiterating supply was not yet at a point critical enough to cause release from the SPR. One thing we note in this latest administration statement: no mention that it will continue uninterrupted purchases for the SPR. We talked with several oil traders Wednesday and some noted that omission was not missed by their colleagues.
That may have been part of the mix, as to why oil fell further, but basically this is a pullback after a torrid run. There has been no official change in administration policy, and there has been little change elsewhere to warrant oil dropping other than the market ebb and flow. Indeed, US oil inventories were expected to rise 600K bbl but instead fell 1.7M bbl. What was positive about this, however, was that distillates (what is used for heating oil) rose. As the driving season winds down (gasoline inventories were flat), heating oil is what traders are now focusing upon. That rise in distillates offset the lower overall inventories. Gasoline did well given the driving season is ending and inventories will be reduced; flat means that prices, contrary to what we hear every day, are not going to jump right back up.
Did the market rally on this news? It has not been rallying on the decline, but it no doubt has anticipated some decline as this rally started even as oil was reaching new 2004 highs. Moreover, oil was dropping rapidly Monday and Tuesday, but stocks made no headway. One thing is for certain: it definitely did not hurt the action in stocks.
July new homes sales drop 6.4%.
Bubble theorists are gleeful at the weaker housing numbers. July sales were much less than expected and June sales were revised lower than previously reported. The existing home inventory hit 4 months, the highest level in 18 months. Surely the sky is falling on the housing market they solemnly acknowledge.
Give me a break. Units were down after a surge in buying earlier in the year ahead of anticipated rate hikes. Now rates have fallen even more than anticipated (the Fed hikes short term rates and hopes it can impact long term rates by so doing; it does not work that often, especially early on). We saw new purchase applications and refinancing applications surge the past few weeks given the lower mortgage rates. Those have yet to show up in the numbers (the Wednesday report was a July report) and won't until they convert into sales. That can take a month or more.
Thus we will see housing sales stabilize and recover some ground. What gets us is that these are still high levels and that home sales are typically early cycle indicators. They were especially important this time around given 9-11, but now that the economy has resumed expansion and money is freely moving between different sectors of the economy, it is quite natural for housing to slow down and retrench.
Durable goods orders take off in July with a 1.7% jump lead by airplanes.
Take out those orders for planes and you get a 0.1% gain. Wow. At least June was revised higher to 1.1% from 0.9%. Moreover, non-defense capital investment rose 0.6%. That is the proxy for business investment, and that level is still brisk though it could be better (June showed a 1.4% rise). Once again, uncertainty regarding the future, namely oil prices, the election and the status of the tax landscape, are holding up deeper investment in business.
THE MARKET
Stocks started volatile but then rallied through near key resistance in the form of the 50 day EMA for SP500 and DJ30, and 1850 for NASDAQ. The small caps also moved back over the 200 day SMA. SOX helped out, coming back from its Tuesday selling. It still was not able to recover the 18 day EMA, however, something that it will have to do to allow the market to continue this move higher.
Volume was up on both NYSE and NASDAQ as stocks resumed their move higher. As noted, volume remains light overall and thus the rally lacks real conviction that will push it to a new breakout. It is showing accumulation starting, however, something that this market needed in order to set up the move that does eventually provide the breakout.
The Wednesday action leaves the indexes in search of the next resistance level to attempt to conquer. For NASDAQ that is the 50 day EMA, for SP500 it is the 200 day SMA. Both will be formidable, and they could be the point where this rally ultimately runs out of gas. That does not mean they will reverse sharply at that level, but as in June, start to stall and sputter as they move higher, then start more of a lateral move. That lateral move could become a handle that shakes out more sellers and provides a breakout, or it could become another drop toward the 2004 lows, a more powerful shakeout. We still view the action setting up the latter versus the former given the weak sentiment indicators, the low volume to this point, and the lack of a lot of strong leaders.
Market Sentiment
Volatility slipped to 15 on the close. As noted last week, volatility has set up a relationship to the indexes. When volatility reaches 14 on the downside it has immediately preceded a top in the market. It could take another day or two and VIX is right there.
VIX: 14.98; -0.35
VXN: 21.41; -0.56
VXO: 14.63; -0.58
Put/Call Ratio (CBOE): 0.78; -0.01
NASDAQ
Moved through 1850 resistance on some slightly better but below average volume, rising into the close. Setting its sights on the 50 day EMA.
Stats: +23.83 points (+1.3%) to close at 1860.72
Volume: 1.324B (+0.79%). No surge, but getting back up toward the levels last week when NASDAQ was in its rally. Bigger picture it is not enough to break it out from the base. It is also starting to show accumulation, however, something it needed to do.
Up Volume: 1.092B (+573M)
Down Volume: 200M (-518M)
A/D and Hi/Lo: Advancers led 2.08 to 1. Solid breadth. At first it looked as if it was only going to be a large cap rally. The buying spread out in the afternoon.
Previous Session: Advancers led 1.19 to 1
New Highs: 43 (+8)
New Lows: 49 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After two days of rest below 1850, NASDAQ rallied off the up trendline and managed a breakout. It is one of those situations where a breakout just leads to more resistance, but that is what digging out of a hole is all about. The next level is the 50 day EMA (1876), and that is below other significant resistance at 1900 (the simple 50 day MA at 1898 as well). Volume continues to lag below average, so there will be a point where resistance finally conquers that low volume bullishness.
The large cap techs slightly outpaced the overall index with NASDAQ 100 already reaching the 50 day EMA (1391). Volume was higher though still significantly below average. A key level for the NASDAQ 100, but it still needs to foray higher into the prior range, up toward 1425 in order for it to set up better for a significant test that sets the bottom of the base.
S&P 500/NYSE
Made good on its days of rest, breaking through the 50 day EMA on rising volume. Now it faces the 200 day SMA. No time to rest now.
Stats: +8.77 points (+0.8%) to close at 1104.96
NYSE Volume: 1.188B (+8.85%). Much better volume but as with NASDAQ, still well below average on the session. Modest accumulation is showing up with the improved price/volume action. Overall volume is not strong enough to punch through for a big breakout. As long as the sellers stay at bay, however, it is enough to keep the index rising or hold onto the gains.
Up Volume: 880M (+346M)
Down Volume: 298M (-227M)
A/D and Hi/Lo: Advancers led 2.34 to 1. Small caps were lagging the market, but were still up enough to post a good overall breadth reading on NYSE.
Previous Session: Advancers led 1.26 to 1
New Highs: 105 (+16)
New Lows: 16 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied through the 50 day EMA (1099) and right up to the 50 day SMA (1105). Indeed, it managed to trade above that level (1106), but gave back a bit late. Much better trade and pretty decent action as the large caps were one of the top performers, helped by Boeing and its aircraft orders. It never gave us a test back to the 18 day EMA (1090), though it did tap at that level on the intraday low before it started the rally. It now faces the 200 day SMA immediately ahead (1110), one of the levels that could stall the move. Would like to see SP500 make 1125 before this move stalls, but we also have to watch the lack of volume and the VIX heading toward 14 as an indication the move is running out of gas.
The small caps reclaimed the 200 day SMA, but did not make a stronger move higher out of the recent range as did the large cap indexes. That keeps it in that bearish head and shoulders pattern and fighting at key resistance.
DJ30
BA helped the blue chips Wednesday just as CAT pulled the load Tuesday. BA posted new orders that helped surge its volume and DJ30 volume as well. Surge is a loose term; it was up substantially but still well below average. DJ30 managed to clear the 50 day SMA (10,154) on the move as it too sets its sights on the 200 day SMA (10,250). That is just 70 points away and the level we are looking for this move to hit before it runs out of steam. Again, with VIX approaching 14, we have to be cognizant of the near resistance levels. With volume remaining low overall this next important resistance level is even more significant.
Stats: +83.11 points (+0.82%) to close at 10181.74
Volume: 172 million shares Wednesday versus 143 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
A solid resumption of the rally move Wednesday sets the stage for the next resistance test. It is an uphill struggle digging out of a hole, and even though price/volume action is improving, the levels are not such that we anticipate a serious breakout from the base on this particular rally. When the major indexes get to the next major support we are going to start watching for the move to stall. While we had confidence that the indexes would clear the resistance they did Wednesday, now the volume will start to come into play as stocks hit the next layer of ice. Again, it most likely will not be a knifepoint turn; there is some life to this move and it most likely won't give up in just a session.
Think in terms of June where the market tried to struggle higher to continue its move but ultimately failed; that took almost the whole month to get through. Frustrating to have that happen again, but some time at this level is what the market needs to allow the leaders to consolidate their gains. The stronger stocks will use that time to form handles, i.e., lateral and slightly lower moves on low volume. That sets the stage for them to breakout once the pullback is over.
Not all stocks that have rallied this month will manage to hold up in the test. Indeed, if the test is a severe one only the very strong will survive. Thus when we see VIX hitting near 14 and the accumulation price/volume action starts to end or distribution starts popping up (selling on rising volume) we will guard positions closely, cutting those that have not been performing as well or start showing distribution on their own. We have some good stocks that are holding up well in continuing uptrends or solid breakouts, but a serious test will test all of them and only the strongest will survive. Those will be the leaders for the move higher, and we will be scanning for the other stocks that do the same.
From here we will continue to view strong moves as something to participate in even though we anticipate the rally will run out of steam at one of the important resistance points ahead. The market always does what it will regardless of our expectations, and if volume starts surging on the upside we don't want to ignore what the market is telling us. Thus we are still looking for the volume movers in good patterns; if the big money is buying into them they will be more likely to hold onto them in the face of some selling.
Support and Resistance
NASDAQ: Closed at 1860.72
Resistance:
May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The 50 day EMA at 1876 is key resistance.
The March 2004 lows (1897 - 1989)
The 50 day SMA 1899
The 2004 down trendline at 1934
The 200 day SMA at 1972
Support:
1850 (July lows).
The October 2002/March 2003 up trendline at 1832
The 18 day EMA at 1830
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).
S&P 500: Closed at 1104.96
Resistance:
The 50 day SMA at 1105 stalled the move Wednesday.
The 200 day SMA at 1111
The March/April down trendline at 1121
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 50 day EMA at 1105
1096 to 1100 represent price support.
The 18 day EMA at 1090
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 10181.74
Resistance:
The 200 day SMA at 10,250
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 50 day EMA at 10,107
The February/April down trendline at 10,110
The 18 day EMA at 10,044
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 24
Existing Home Sales, July (10:00): 6.72M actual versus 6.81M expected and 6.92M prior (revised from 6.95M)
August 25
Durable Orders, July (8:30): 1.7% actual versus 1.0% expected and 1.1% prior (revised from 0.9%)
New Home Sales, July (10:00): 1134K actual versus 1300K expected and 1211K prior (revised from 1326K)
August 26
Initial Claims, 08/21 (8:30): 335K expected, 331K prior
Help-Wanted Index, July (10:00): 38 expected and 38 prior
August 27
GDP-Preliminary, Q2 (8:30): 2.7% expected and 3.0%
Chain Deflator-Preliminary, Q2 08:30): 3.2% expected and 3.2% prior
Michigan Sentiment-Rev., Aug (9:45): 94.0 expected and 94.0 prior
End part 1 of 3
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money investment
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