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8/30/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: GRA (took rest off table)
Buy alerts issued: ATRX; JBLU; AVN
Trailing stops issued: MDCC (took rest off table, looking for test to re-enter)
Stop alerts issued: BSTE; ARO
SUMMARY:
- Market starts week weak, selling back to key support in one session.
- Bless the consumer as he spends more than he earns in July.
- Gasoline prices should fall further, some certainty gelling in the election.
- SOX weak and leading downside. Up to NASDAQ & SP500 to hold the line.
- Consumer confidence, Chicago PMI, convention a warm-up for Friday jobs report.
Testing support already as market opens the week start.
We expected the market to open the week softer, and it did just that, falling all the way to key support in one move. This market knows little about moderation; it is either selling or rallying. Volume is not just weak, but very weak. Want a nice, gentle pullback to test support? It gets you there in one session.
Stocks were down all day with only one bounce attempt worth mentioning. That occurred after the first 1.5 hours and carried through early afternoon. It was more of a plateau than a bounce, and it gave way in the last two hours. A feeble last half hour bounce attempt also failed, and that left stocks at session lows on the close, clinging to that key support on NASDAQ and SP500.
True there was not a lot of news to push prices higher. Consumer incomes were lower but spending was higher. Oil was down even with another sabotage of the southern Iraq pipeline. The mixed news was not enough to push prices up with the convention starting and the jobs report on Friday. Indeed, stocks were ready to come back and they did just that with SP500 at the 50 day EMA and NASDAQ at the 18 day EMA on continued light volume. All was pretty much in line, but the SOX is being the spoiler as it led to the downside, closing below 375 after failing to take out the 18 day EMA. Once again things get mighty interesting in a short time.
THE ECONOMY
Incomes grow slowly, spending continues regardless.
July personal incomes rose at the slowest rate in 2 years, edging up 0.1% versus the 0.5% expected (0.2% gain in June). At the same time consumer spending rallied 0.8%, better than expected (0.7%). Indeed, June spending was revised to -0.2% from -0.7%. Lower, but not the black pit that was suggested by many regarding the summer 'slow patch.' We have a feeling that the jobs picture, a summer reading that is also hard to get a handle on, is going to be revised better than expected along with a better August report as well.
There is one thing that is certain: despite all of the talk about a scared consumer, consumers are not scared. Indeed, they are pretty confident as the Michigan report showed Friday and as the Conference Board report will show Tuesday. We have noted several times before: consumers stop spending when they feel their jobs are in jeopardy; otherwise they tend to spend. The last consumer confidence report showed much better job enthusiasm despite supposedly poor job creation. That is another indication that the job market is improving more than the employer survey is picking up: consumers are out there in the trenches on the front line. If they are remaining confident we should take note and be ready for positive revisions in economic data.
Gasoline to fall in the face of predictions it will rise.
We have all heard the story the past three weeks: gasoline prices had not risen along with oil, but they would inevitably do just that. There was no science behind this prediction other than a gut belief that gasoline prices had to rise if oil prices rose. Contrary to this opinion, gasoline prices have been falling though they did stabilize some over the past week.
This past weekend and Monday we talked with some oil traders as well as some oil and gasoline brokers. Gasoline supplies are rising and wholesale gasoline prices are tumbling. Soon that decline in wholesale prices should start moving through retail prices. While refining capacity is still too low and needs to be rectified, the US is hitting the tail end of the driving season with good inventories of fuel. That is putting downward pressure on prices regardless of what oil prices are doing. Supply and demand: if gas supplies are high, prices will be lower even if oil prices rise. We saw that the past month, and we will see prices decline further over the next few weeks.
That will be of course good for the consumer as less disposable income will go to paying for gasoline. As the consumer likes to spend, that money will go to more clothes, cars, electronics, etc. Every little bit helps, particularly when looking toward the holiday season ahead. Things will slow as always during October ahead of holiday spending, but then if the jobs picture continues to improve, spending will turn higher again into Christmas.
Market seeing some certainty gelling in the election.
No we are not espousing the theory the market rallies when Bush gains in the polls. What we are talking about is the futures markets that handicap the potential for victory in the election. These are real markets where real money is put up for profit unlike the many opinion polls we are hit with every day. The IOWA futures market was tighter than a fish's bottom for over a month. Over the past week it had something of a breakout with Bush currently assigned a 56% probability of victory versus a 44% probability for Kerry. The other futures market assigns 57% to Bush and 43% to Kerry. These tend to be highly accurate, but they also change, as we have just seen, from week to week. Thus their predictive value is depends upon where they are basically at election day. More than two months out, well, they are interesting to watch.
THE MARKET
Leadership (or more appropriately, the lack of it) flip-flopped again Monday. Friday the techs and small caps were back in the lead as stocks moved upside. Monday they were leading lower while the large caps were more restrained in their selling. It is a familiar theme in this market: when the techs and small caps are up the market is up; when they are down the market is down. Monday, all of the indexes were down, and the leadership indexes (both up and down), were leading the way.
We expected the softer start to the week, but as noted, the selling was sharper for one session than we wanted. A nice, slow pullback would have been best, but that certainly did not happen with the indexes down 0.5% to over 2%. All managed to hold more or less at important support, but the quick drop simply makes the current test more important. As it is, they lost ground on lower volume, so at least there was no distribution. That was the silver lining Monday, but when you consider volume has been low all the way up during the rally, then the lower trade is not all that comforting.
SOX was the downside leader again, and we are watching it closely as it has been an anchor on the entire market. It has been unable to clear its 18 day EMA (386), and it turned back down from that level Monday once more. It is still holding near support at 375, the level that prevented a further fall last week. Tenuous, however, as the index is still trending lower, making lower and lower highs the past 2 weeks even as the market rallied. Given its continued weakness, added pressure is placed upon SP500 and NASDAQ to hold this support to allow the market to continue to advance on this leg higher. We still feel it is critical the market advance further to set up that next test lower that would create a better bottom for the base.
Market Sentiment
Volatility gapped up as the market sold off. It had approached the 14 level during the recent rally, the level that has stalled prior moves this year. That gives this upside move more life, and it is one reason along with the continued positive price/volume action that we believe there is more upside on this particular leg.
VIX: 15.44; +0.73
VXN: 23.14; +1.87
VXO: 15.11; +0.32
Put/Call Ratio (CBOE): 0.85; -0.07
NASDAQ
Sold back to the 18 day EMA and up trendline in one move, hampered by the SOX. Left it little maneuvering room on this pullback.
Stats: -25.6 points (-1.37%) to close at 1836.49
Volume: 1.009B (-0.87%). Volume backed off on the session as NASDAQ shows another extremely soft volume session. Overall price/volume action remains positive, a nice conversion from the July and August distribution.
Up Volume: 130M (-554M)
Down Volume: 869M (+562M)
A/D and Hi/Lo: Decliners led 2.14 to 1. Pretty broad selling coincident with the start of the downturn.
Previous Session: Advancers led 1.69 to 1
New Highs: 29 (-14)
New Lows: 41 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After reaching toward the 50 day EMA (1873) on the Friday high, tech stocks gapped lower and sold all session. NASDAQ closed on the low, right on top of the 18 day EMA (1836) and the October 2002/March 2003 up trendline (1836). As noted last week, this is an important test. NASDAQ had been trending lower below the 18 day EMA since early July. It managed to move through the 18 day EMA during the recent rally, and has made a stab at the 50 day EMA. Stocks in downtrends tend to move down the 10 or 18 day EMA about four bounces, then rebound higher to test the 50 day EMA. If they are weak, they resume the downtrend. If they have more left on the upside move, they test the short term MA (10 or 18 day) and rebound to move through the 50 day EMA. NASDAQ is right in the middle of this test, and it is good to see volume remaining low. It needs to hold near this level and resume the move. As noted last week, at this stage of the rebound, the move will become more difficult and more volatile. Looks like that has started, but it still will have to hold.
Similar action in NASDAQ 100 and QQQ with the QQQ showing a bit more volume on the drop to the 18 day EMA. QQQ certainly has the look of a resumption of the downside move.
S&P 500/NYSE
Large caps turned lower after the Friday test of the 200 day SMA, falling to the 50 day EMA on lower volume.
Stats: -8.62 points (-0.78%) to close at 1099.15
NYSE Volume: 843.177M (-3.7%). Volume contracted on the pullback to test the 50 day EMA. Volume continues to show that improved price/volume action that lends to formation of a bottom in the index overall, though we continue to note that all volume has been very low during this rally and thus suspect.
Up Volume: 161M (-395M)
Down Volume: 674M (+402M)
A/D and Hi/Lo: Decliners led 1.56 to 1
Previous Session: Advancers led 2.15 to 1
New Highs: 76 (-23)
New Lows: 14 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After the Friday tap a the 200 day SMA (1111), SP500 rolled over and fell to next support at the 50 day EMA (1099.82), slightly undercutting that level on the low. There is still the 18 day EMA (1094) hanging out below that can provide some support (10 day is at 1087), but you don't want to see it give back too much more on this pullback. As with NASDAQ, the larger one session drop leaves it little maneuvering room during this test.
The small caps failed at the simple 50 day MA Monday, falling through the 200 day SMA and the 50 day EMA to close on top of the 10 day EMA at 275.95. Need to hold 275.
DJ30
Blue chips turned over and faded toward the 50 day EMA (10,113) after moving toward the 200 day SMA (10,255) last week but falling well short of that level. Volume edged ever so slightly higher Monday, but not at a level to indicate any serious distribution. Volume overall remains low on the index, showing no increase in sellers after last weeks rally. Want it to hold the 50 day EMA or the 18 day EMA (10,077).
Stats: -72.49 points (-0.71%) to close at 10122.52
Volume: 114.8 million shares Monday versus 114.5 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The republican convention is on along with the accompanying protests. As the week progresses and nothing major happens, that will help bolster the market as concerns over a terror event diminish. At 10ET Tuesday there is Consumer Confidence and the Chicago PMI, both highly watched economic reports, the latter being more germane to whether the economy continues its rebound attempt from the 'soft patch.' The first two regional reports of the month were disappointments, but there continues to be underlying solid data regarding business activity (the GDP report is an example as business investment was strong). All of this, of course, is a warm-up for the Friday employment report, the lagging indicator that means so much, particularly to the election. Politics is notorious for ignoring the true economic indicators and focusing on the prior battle. Thus the jobs report is very significant but with respect to the economy, takes a back seat to business activity. After all, jobs come from business activity.
With the weak close Monday, we are expecting more weakness early Tuesday. Then the key is whether stocks find some strength from the Consumer Confidence report and the Chicago PMI and hold these near support levels. That will be the key to resuming the climb higher in this leg. Certainly QQQ and SOX do not look conducive to a further rise, and we are watching the volume closely along with the support levels. While we really want to see this move continue higher to better set up a test to try and complete the bottom, we don't want to blind ourselves to what is happening. If volume starts to increase significantly and support is broken, we have some more downside plays we are going to be looking at as well as closing out upside positions that are struggling to hold support.
As noted before, this is an important test for the indexes as they come back after their first leg higher to take a breather and try to set up for the next leg up in this rebound. VIX rallied on the selling without ever hitting 14, a contrary indicator that suggests more upside along with the overall improvement in price/volume action. We still see many stocks in good position, making low volume tests of their recent moves. They will need to hold and provide leadership back to the upside for the market to continue its rally.
Support and Resistance
NASDAQ: Closed at 1836.49
Resistance:
1850 (July lows).
The 50 day EMA at 1873 is key resistance and held last week.
May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The March 2004 lows (1897 - 1989)
The 50 day SMA 1891
The 2004 down trendline at 1930
The 200 day SMA at 1970
Support:
The October 2002/March 2003 up trendline at 1836
The 18 day EMA at 1836
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 1099.15
Resistance:
The 200 day SMA at 1111
The March/April down trendline at 1120
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 1100 is trying to hold.
1096 to 1100 represent price support.
The 18 day EMA at 1094
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
Dow: Closed at 10122.52
Resistance:
The 200 day SMA at 10,255
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 10,113
The February/April down trendline at 10,095
The 18 day EMA at 10,077
9783 to 9793, the August lows.
9625 - 9660 from September 2003.
9500 from various price points in late summer to fall 2003.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 30
Personal Income, July (8:30): 0.1% actual versus 0.5% expected and 0.2% prior
Personal Spending, July (8:30): 0.8% actual versus 0.7% expected and -0.2% prior (revised from -0.7%)
August 31
Consumer Confidence, August (10:00): 103.4 expected and 106.1 prior
Chicago PMI, August (10:00): 60.0 expected and 64.7 prior
September 1
Auto Sales, August: 5.4M expected and 5.5M prior
Truck Sales, August: 8.2M expected and 8.4M prior
Construction Spending, July (10:00): 0.4% expected and -0.3% prior
ISM Index, August (10:00): 60.0 expected and 62.0 prior
September 2
Productivity-Rev., Q2 (8:30): 2.7% expected and 2.9% prior
Initial Jobless Claims, 08/28 (8:30): 340K expected and 343K prior
Factory Orders, July (10:00): 1.1% expected and 0.7% prior
September 3
Non-farm Payrolls, August (8:30): 150K expected and 32K prior
Unemployment Rate, August (8:30): 5.5% expected and 5.5% prior
Hourly Earnings, August (8:30): 0.2% expected and 0.3% prior
Average Workweek, August (8:30): 33.7 expected and 33.7 prior
ISM Services, August (10:00): 62.2 expected and 64.8 prior
End part 1 of 3
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