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us stock market, understanding the stock market
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8/31/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: DSCO
Trailing stops issued: JOSB
Stop alerts issued: COG; SGMS
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:
- Bullish afternoon reversal on better volume fueled by short covering, long buying.
- Chicago PMI continues weak regional data as up & down confidence falls.
- Some volatility, but solid session paves way for further advance.
- Stage being set for jobs report.
Stocks test support, rally back on rising volume.
Stocks were modestly lower when weaker manufacturing and consumer confidence reports indicated the 'soft patch' was still mushy. The news brought in more sellers and stocks were down on rising volume. SP500 sold to the 18 day EMA, bumping along that support level three times over the morning and into lunch. Then it found firm footing with just over 1.5 hours left. Stocks rebounded on continued expanding volume with buyers chasing shares to session highs at the close. Once more the market showed bullish undertones. After a soft start to the week stocks sold further but then rallied, showing a volume reversal even in the face of further weak economic news. As we noted before, the ability to disregard negative news is a sign of a healthier market.
There was short covering that helped spark the move when SP500 would not fall through the 18 day EMA. Indeed, many floor traders we talked to noted this during the session, and it was played up on some of the financial stations. That does not, however, explain all of the action. The mid-caps (+0.8%) and small caps (+0.5%) were leaders, and thus breadth was solid. In prior episodes of short covering as seen in July, breadth was narrow as those stocks shorted were covered. Typically that involves the large caps that are easily shorted. With the small and mid-caps in the lead, the afternoon rally that saw NASDAQ add 18 points and SP500 added 10 involved both covering and long buying. The combination allowed a good tap at support and reversal, paving the way for further gains in the current rally.
THE ECONOMY
Manufacturing continues its July struggles.
The Chicago PMI failed to change the scorecard set by the New York and Philly Fed reports earlier in the week. The 57.3 reading was well below the 60.0 expected and the 64.7 from July. The silver lining for the jobs report was the employment index rising to 51.1 from 45.6 in July. Otherwise, it was more of the same: lackluster performance. Prices paid surged to 86.6 from 77.6. New orders fell to 58.0 from 68.7.
These numbers mirror what was seen in the New York and Philly reports earlier in the month. They continue showing expanding activity, but at a slower and slower pace. Business investment was solid in Q2, but the first two month's of Q3 data show an economic slowdown continuing. Not a collapse, but a slower expansion as businesses continue to hold back some, still in fear of the future.
Consumer confidence flipping and flopping on jobs.
In July the Conference Board enthusiastically emphasized the jump in confidence was based on jobs. Tuesday, the emphasis was again on jobs, but in a negative light as August confidence fell to 98.2 (103.4 expected, 105.7 in July). One month rah-rah jobs, the next boo-hoo jobs. It was the first decline in five months. Those seeing jobs plentiful fell to 18.1 from 19.7. 15.4% expect jobs to be scarcer in the future, up from 13.5%. Those expecting more jobs in the future fell to 16.2% from 19.1%. Job anxiety is growing, but at this level, it is still not at critical levels.
Indeed, the poorer jobs expectation comes after the July employment report and the less than expected non-farm payrolls number that has been drummed into the populace on a daily basis. Advertising works that way; if you get the idea out there enough it becomes accepted. We believe there will be an upside surprise in the August data as the earlier summer data becomes more complete. No great surge, but ahead of expectations as the summer adjustments are smoothed out by the actual results. The manufacturing data shows that hiring is still not at the levels seen earlier in the spring, but the weekly claims are better, the household survey is very strong, and hiring firms suggest jobs growth remains strong. This is a similar scenario to early in the year when jobs created shot higher. There is some meat to take from the confidence report, and thus we don't believe jobs will be at the 250K levels earlier in the year.
THE MARKET
Leadership once more reversed as the mid-caps and small caps led the action. The large caps other than techs were there as well, however, matching the small caps gain for gain. That gave the market rebound its nice breadth, at least on NYSE, and splashed cold water on the notion it was just short covering. Short covering to be sure, but there was also some longer term buying as the rally found itself at support and started back up.
With the solid reversal on volume in the afternoon, the critical test for the market looks as if it is succeeding. This has to be counterbalanced with the fact it was the end of the month and that some portfolio shuffling took place. Thus it was not as positive as it looks at first blush. Still, some strong moves helped pave the way back upside as many stocks used the session and one-half to shake out some sellers and then resume the move. So far so good; the market started the week softer as expected, and now appears to be making the rebound to move back up to test near resistance once more and then beyond.
Looking at individual stocks, there were those that were ready to jump on the next rebound, and several were doing just that. Those movers were still scattered, however. What we do see a lot of are dojis at support. Many stocks sold below near support but then rebounded to recoup the losses and even post gains. After the first wave of stocks make their move at the first opportunity (Tuesday), these are the next ones to make their upside moves. Indeed, the NASDAQ is showing the same action, undercutting the 18 day EMA and the up trendline only to furiously rebound to close right at those levels.
In sum it was not a powerful reversal, but it was a solid rebound on the best volume in a week. Once more the sellers had no punch, and when the downside pressure dried up buyers moved back in. Continued bullish action and a nice recovery at a critical juncture. Still has to deal with that resistance that stalled the move last week, but the reversal was solid and an indication there is still a bullish bias in this rally and the move helps pave the way to continue the move. We still don't think this is the move that delivers a new breakout, but is the one that sets it up.
Market Sentiment
Slight decline in volatility as stocks turned back up and closed mostly positive. It will take more upside sessions to push volatility back to the 14 level that has marked the tops to market moves this year. The nice thing is this gives the market time to rally higher and drop VIX lower, and time is what the market needs to do to set up that next test that sends the sentiment indicators surging to extremes. We have already seen the bulls/bears ratio narrowing during this rally off the July lows. Another dump lower would most likely do just that as they have been turning more bearish even on the this rebound.
VIX: 15.29; -0.15
VXN: 22.92; -0.22
VXO: 14.98; -0.13
Put/Call Ratio (CBOE): 0.71; -0.14
NASDAQ
Nice hammer doji at the 18 day EMA and the up trendline. The rising volume on the move indicates another rebound to test the 50 day EMA.
Stats: +1.61 points (+0.09%) to close at 1838.1
Volume: 1.313B (+30.1%). Volume jumped significantly from very low levels. That puts volume on par with the better sessions last week, but still well below average. In the current market every move is a miniature of 'normal' action. Thus we look at the cues to move up and down just as we would if volume were stronger overall, but we overlay that with the understanding that overall low volume rallies, even if they show good price/volume action, are subject to failure. That also plays into our thesis that this move is a precursor to another test that sets the bottom of the base.
Up Volume: 540M (+410M)
Down Volume: 706M (-163M)
A/D and Hi/Lo: Advancers led 1.46 to 1. From -1.5:1 to reversing that ratio. Not bad.
Previous Session: Decliners led 2.14 to 1
New Highs: 46 (+17)
New Lows: 50 (+9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Sold through support at the 18 day EMA (1836) and the October 2002/March 2003 up trendline (1836), then reversed on volume to hold those levels on the close. Has the look of a reversal that allows further upside after holding support. This sets the stage for a move back up toward the 50 day EMA (1872) and the 50 day SMA (1888). NASDAQ did not fully test the 50 day EMA on the first run in the rally, but looks as if now it will have that opportunity. We want to see it clear 1872 and makes its way toward 1900, even 1950, to better set up the next test. While the Tuesday move looked solid, we are expecting volatility to increase as the index shows spurts of strength then spins its wheels some.
Similar action on NASDAQ 100 and QQQ: reach down below the 18 day EMA and then a smart rebound on rising volume to hold that level to the close. Still have the 50 day EMA to again tackle as the rebound resumes.
S&P 500/NYSE
Nice test of near support, reversal, and positive close on stronger volume. Textbook test that sets up a further upside move to again test resistance.
Stats: +5.09 points (+0.46%) to close at 1104.24
NYSE Volume: 1.129B (+33.86%). Solid volume matching the best trade from last week though still well below average. Price/volume action continues to show a healthier tone, moving to accumulation (however modest) from the prior distribution. That is an important and critical part of any base; stocks have to start showing overall accumulation if they are going to break higher. Volume still remains low overall, and that still suggests this move will succumb to a test of the August lows, but this action is buying more upside time.
Up Volume: 764M (+603M)
Down Volume: 366M (-308M)
A/D and Hi/Lo: Advancers led 2.31 to 1. Nice breadth as the mid-caps led the move higher.
Previous Session: Decliners led 1.56 to 1
New Highs: 121 (+45)
New Lows: 21 (+7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After rallying to the 200 day SMA (1111) Friday, SP500 has already set the stage for a rendezvous. The reach down to support at the 18 day EMA (1095) and solid volume reversal to post a nice gain are hallmarks of a successful test. Ready to take on the 200 day once more and then move on up to 1125 to 1130, about the limit of this rally before it needs to test lower again and set the bottom of the base.
The small caps were not the leaders Tuesday, but they were in the equation. The move, however, only took the index up to the 50 day EMA after tapping at the 200 day SMA on the high. The struggle for the smaller issues continues with the still bearish head and shoulders base.
DJ30
Another nice reach down to support at the 18 day EMA (10,087) and then a solid rebound on rising volume, much stronger than on Friday or Monday. Making a higher low and ready to really give the 200 day SMA (10,257) a run for its money. On the last trip it just waved at that level. This time we want a full test and a move past that level toward 10,500. That will set up a better test in September.
Stats: +51.4 points (+0.51%) to close at 10173.92
Volume: 164 million shares Tuesday versus 114.8 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Wednesday starts September, historically the harshest month on stocks. The Tuesday action suggests the month will start with some upside, but it was also the last day of August, and there was some portfolio shuffling taking place as well. We anticipate a further move higher, but not necessarily a several session surge. What we saw in June was volatility sandwiching good individual moves. We anticipate something along those same lines as the indexes attempt to rebound toward recent resistance and even onto the next level.
After that move, a move that could take up to 2 weeks, we anticipate weakness to move back in ahead of the election. If the move higher is choppy we expect sentiment indicators to remain elevated, making a subsequent move lower all the more effective as the sentiment indicators will start from a higher level. Bearish sentiment was lacking on the last test as well as any attempted market accumulation. This time we have some better price/volume action, sentiment indicators moving higher, and the potential for new leaders to pop up as they continue working on their bases. Again, a combination missing from the prior test.
We will continue to watch volume. If there is a surge in trade, that can change the 'September test' scenario. Thus far price/volume action has improved, but overall volume remains tepid. We are, however, seeing solid stocks test near support and hold up just fine. Right now and into the next test is a weeding out process where the strong are separated from the weak. The strong will mostly hold their patterns or give quick rebounds from minor transgressions while the weak crack and implode. Many stocks Tuesday were testing and showing dojis at support, an indication they are not yet going to crack. On the more severe test, however, they will show their worth (or lack thereof).
This is all setting up for the Friday jobs report. If stocks rally sharply Wednesday and Thursday and moves through near resistance, they are vulnerable to another weak jobs report. We think jobs are going to be stronger than expected, but the summer adjustments and the tropical storms may still have their impact. If disappointing it could trigger the start of the next test. We will have to see how hard stocks move ahead of that number. Again, if they price in good news with two big moves, then they are set up to be hurt in the month of traditional hurt for stocks.
For Wednesday we anticipate a continued move upside to follow through with the Tuesday reversal. We will know pretty soon if Tuesday was just end of month reshuffling. We also have to watch SOX as it still languishes in its downtrend below the 18 day EMA. Nonetheless we are looking at those stocks that have held their ground during the recent test. We are still willing to start accumulating positions on such stocks, but also very aware of the overall market action. In other words, if volumes remain low overall on a continued move higher (even if they show solid price/volume action), we know the upside move is limited by its own lack of strength. It is incumbent upon us to keep close watch on the price/volume action, and when it starts to shift and thus indicates the downturn coming we lock in some gain, get rid of the so-so performers, and let the best of the best continue to work for us.
Support and Resistance
NASDAQ: Closed at 1838.10
Resistance:
1850 (July lows).
The 50 day EMA at 1872 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 1888
The 2004 down trendline at 1928
The 200 day SMA at 1970
Support:
The October 2002/March 2003 up trendline at 1837
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 1104.24
Resistance:
The 200 day SMA at 1112
The March/April down trendline at 1119
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.
1096 to 1100 represent price support.
The 18 day EMA at 1095
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
Dow: Closed at 10173.92
Resistance:
The 200 day SMA at 10,257
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 10,115
The February/April down trendline at 10,090
The 18 day EMA at 10,087
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): 98.2 actual versus 103.4 expected and 105.7 prior (revised from 106.1)
Chicago PMI, August (10:00): 57.3 actual versus 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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us stock market
understanding the stock market
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