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us stock market, trade stock
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9/04/04 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: VIP
Buy alerts issued: RL
Trailing stops issued: None issued
Stop alerts issued: ISCA
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 mostly fights off Intel news, holds at support ahead of the new year next week.
- Jobs report beats, matches, and shows positive revisions while services sector slows its expansion.
- SOX tanks as NASDAQ, SP500 hold support. Who will lead?
- Stocks ready to start the 'new year' on Tuesday.
Decent performance, all things considered.
NASDAQ was a lock to be under pressure given the INTC lowered guidance, and SOX dove lower at the open as it and the chip stocks never came up for air. NASDAQ sold to the 18 day EMA where it held the line while volume barely budged. SP500 slipped to the 200 day SMA on low trade, but volume was much lower. Similar story with the other indexes. Indeed, DJ30 was positive in the last hour though some late weakness took it negative at the close. Volume modest, breadth modestly negative, indexes holding support. Not bad action given the circumstances.
The market rallied the past three weeks on lower volume to get to this point. That low volume made it susceptible to sellers when some really bad news finally hit. INTC was bad news. It was not the only bad stock news. ALTR and CY, both in semiconductors, warned. EFII in software warned. Then the employment report released was not great news; it was good news, but not a stellar upside surprise. That actually gave the market some breath after INTC had sucked a lot of it away after hours Thursday. Indeed, the market was rebounding from the gap lower, making a solid advance as NASDAQ rallied 15 points off the open, SP500 6 points higher. Then lackluster ISM Services data issued and that put a chokehold on the rebound attempt. The bad news took two out of three and stocks sold off.
It was a pre-holiday session, so low volume was expected. Even with the bombardment of news and the selling in semiconductors, however, the volume was still low. One wonders if this occurred next week when all the fund managers are back at work whether the action would have been downright ugly. Stocks have rallied to this point on low trade. Does the market really have the strength it appeared to have Friday as NASDAQ and SP500 held support? Next week and the start of the second or new year for stocks in 2004 will tell more of that tale. We are concerned about the rally's health. Unless it is rescued by a bunch of big money buyers we still feel it is going to make another test lower in this base to set the bottom for a rally into the last part of the year.
THE ECONOMY
Investors exhale in relief as jobs report shows decent growth and revisions.
June and July were revised higher as anticipated, though it was no massive surge. The revisions and their magnitude were to be expected given the differences in the household and employer reports as well as the regional manufacturing reports. That boosted spirits even though the August employer report showed slightly fewer jobs created than expected (144K versus 150K).
June was revised to 96K from 78K while July gained 73K versus the 32K originally reported. That puts monthly job creation at 100K/month the past three months and 200K/month for the last year. 1.7 million jobs were created. Services (healthcare, financial services, technical services) gained 108K. Manufacturing gained 22K and construction gained 15K. Telecom was the only down sector, dropping 11K. Not bad numbers, not great numbers.
Unemployment rate falls, still showing creation of self-employed, contract workers.
The unemployment rate fell to 5.4%, the lowest since September 2001, and we all know what happened that month. While the July rate showed a lot of self-employed and private contractors, the drop in August was not all increases in the self-employed. The work force contracted by 152K, and as we all know, if you shrink the denominator, the ratio improves. We are not too concerned about that, however, because it is something that varies widely month to month.
What the household survey does tell us is that there is still a lot of new small businesses and contract workers out there. The new small businesses is nothing new. After the early 1980's and early 1990's recessions new businesses sprang up all over the place. There were the same complaints: low job growth and industries losing jobs overseas or being lost altogether as new technology came online. There is not much difference this time around with the complaints or with the change in character of jobs: each time the economy shifts into a new technological gear there us displacement and upset. It never gets any easier, but we always come out stronger and with a lot more and better jobs. Those without foresight rail against it. Some that understand what is going on still rail against it to forward their agenda. The smart look to see how they benefit from it by re-educating themselves, looking for those stocks that are emerging as leaders, etc.
In addition, the jobs report still shows large numbers of contract workers that do not show up as employees for the jobs report. Companies, burned from the excesses in the 1990's, are still reluctant to bring on all of the full-time workers they could. Instead they continue to use contract workers who don't get healthcare (at least from the company) or other benefits. Kelly Services says companies are still using temps a lot as they like 'just in time' hiring to handle the jobs they need as the jobs arise. It is improving. A year ago Kelly said it was 100% contract hiring. Recently it has started to drop. That will help the employer number in the future.
Healthcare issues are still a problem.
One of the reasons companies are not hiring when they perhaps could hire more is the cost of overhead for employees. They simply do not want to take on the fixed costs when there is a big pool of contract workers to utilize whether accounting, engineering, legal, or otherwise. It seems amazing when you think of it, but something in the ballpark of 35% of the cost of your car is healthcare benefits paid to autoworkers. Companies spend incredible resources on managing and funding healthcare programs. It takes a lot of resources to simply keep up with the regulations, let alone the costs.
We see the new HSA (health savings accounts) as the direction companies are heading. Opponents are wrong when they say only 2 million people would ever use them. Since the restrictions the insurance and healthcare lobbies had put on the original versions have been removed, their use has exploded. They allow a person to buy a high deductible insurance policy ($1000 or above) and then allow that person to put 100% of the deductible in a special savings account and then deduct 100% of that money from taxes. You can also deduct your out of pocket expenses against your taxes without that ridiculous 1% of gross income calculation. If you don't use the money it rolls over; the account can be kept in cash, invested in mutual funds, stocks, etc. Some people we know have almost $100K in their accounts now. Once they reach 59.5 years of age they can use it for anything. Needless to say, since the restrictions (on the amount of such policies and limitations on deductions) have been removed, the popularity has surged. MORE THAN 2,000,000 people right now already have they plans.
Companies are going to head this route as well. Most companies have gone to 401K plans as opposed to pension plans. You put in money, they put in money, and it is deductible. We see the evolution of HSA's and employer plans taking a similar path. What is the biggest cost of healthcare now? Prescription drugs and unnecessary visits. Doctors prescribe medications and patients go to see the doctor for any reason because "insurance covers it." Hence insurance rates rise higher and higher as we are all trained to take advantage of a poor system.
With HSA programs, the individual is in charge as the individual controls the money. The individual makes more decisions about his or her healthcare because the individual controls that key first money that is involved in the day-to-day healthcare. The best way to get control of costs is to stop the spiral of overuse of an overly regulated sector that is now more of another entitlement than a for profit business. We cannot make an overnight transition; it won't work for seniors because they don't have the time to build up the account. It will work for the younger workers on up to the middle aged workers, and it will bring healthcare costs lower.
My family pays much, much less for our insurance using an HSA as the premiums for a high deductible account are substantially lower. At the same time we are building up a nice account that now more than covers our deductible. The neat thing is, with these policies, once you cover your deductible you pay no more. Our healthcare costs have dropped because of this, yet we are still covered and have a nice pile of cash accumulating. No one will use these? Absolute nonsense. The government has finally put together a free-market plan that provides the right incentives for individuals to take control of their own healthcare. This is even more evident when it is announced that Medicare premiums are going to have to rise 17% to pay for the program.
Services sector expansion slows, but hiring looks better.
August came in at 58.2, below the 62.8 expected and the 64.8 in July. While the market took this hard and used it as a reason to sell into the early rebound, the trend in the growth is still very solid. Indeed, ISM Services has been on a strong growth trend; a pullback to take a breather now and then is totally consistent with a continued trend higher. Indeed, 58.2 is still very expansionary. The employment sub-index rose to 52.5 from 50.0 in July. Thus we are not too worked up over this number. Overall the economy slowed in the summer, something it often does.
THE MARKET
The selling was not as bad as it could have been overall, but there were major individual cracks in the market, primarily in the semiconductor sector. SOX broke sharply lower in the INTC, ALTR, and CY warnings, hitting a new low for 2004. Chips made a modest rally in mid-August, but failed at the 18 day EMA. Meanwhile, the rest of the market continued to advance. That was pretty much the case Friday just in the different direction: SOX tanked but the rest of the market just eased back to support.
Chips are in full retreat once more. Are they an early leader for the rest of the market or just heading off on their own while everything else fares well. Never are things that easy. First, chips are very important to just about everything made. There are even going to be chips in the packaging of everything we buy. Thus, if they are in the tank, that cannot be a good sign for the rest of the stocks in the market. Second, while chips are integral, they are not everything. Basic materials, metals, energy are all in bull markets and they don't necessarily rely on chips. Of course, if the chips are forecasting a significant fall in the economy, then even metals, materials, and energy won't be safe: if things slow down enough, demand drops, and that leads to a cascading event for prices and stocks.
Despite the fall in chips we don't think this is last call for the current 8 month base. We have been anticipating that there would be another significant test lower to complete the base, a test that gets sentiment levels jumping to more extreme levels, shakes out the apathy, and sets the stage for a move higher. SOX is most likely indeed acting as a precursor to that move. The indexes are currently holding support on some bad news after a low volume rally.
The real action starts Tuesday when everyone gets back to the market. September is typically a hard time for stocks. In 2000 it marked the top of attempted rally after the initial move down in the bear market as it made the second peak in a double top. In 2001 another summer rally gave way to nasty selling in September. In 2002 a similar result. On the positive side, that selling led to nice rebounds to finish out each one of those years. In 2002 it helped set up the move that broke the long downtrend.
The low volume rally back from the August lows is a prime candidate for another such move lower. We also feel it is necessary to set a bottom in the base. Maybe volume comes back in this week and sends stocks higher and higher. The market has improved (e.g., price/volume action is better), but we don't think it is ready for the upside move from here that leads to a breakout.
Market Sentiment
VIX fell to 14 Friday, the level that has marked the end of each rally attempt or rebound move this year. Thus we are on high alert with respect to the current rally. On some rallies one tap was all it took while on others it tapped 14 twice. Accelerating downside volume is a sign of trouble, and with most everyone back to work this week, volume will certainly rise.
VIX: 13.91; -0.37
VXN: 21.06; -0.56
VXO: 13.91; -0.46
Put/Call Ratio (CBOE): 1.03; +0.11. The ratio shows there is some fear in the market but it is not matching the other sentiment indicators. Moreover, the market has rallied significantly since it showed three closes over 1.0 back in early August.
NASDAQ
Gapped lower on the Intel and other chip news, managing to hold next support at the 18 day EMA.
Stats: -28.95 points (-1.55%) to close at 1844.48
Volume: 1.253B (+3.1%). Volume rose on the semiconductor selling, technically distribution and something we are not ignoring. Overall trade was still very low, lower than Wednesday when techs rallied on strong volume.
Up Volume: 168M (-777M)
Down Volume: 1.074B (+829M)
A/D and Hi/Lo: Decliners led 1.61 to 1. Not bad at all given the strong negatives.
Previous Session: Advancers led 2.01 to 1
New Highs: 67 (+9)
New Lows: 44 (+13)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower and was on the rebound trail when the ISM Services hit. That took whatever there was in the rebound out of the index. It rolled over, could not really rebound, and managed to hold the 18 day EMA (1842) and the October 2002/March 2003 up trendline (1842), the key remaining support in this rally. The distribution starts raising flags, but we will see more clearly this week when volume really returns. We would like to see it move higher from here more to better set the move lower, but with the Intel news still to soak in, the 50 day EMA (1870) still overhead, and the election still 60 days away, this may be the point where it rolls over. It is showing that volatility the past week that we were anticipating as the rally becomes stretched.
QQQ/NDX sold back below the 50 day EMA (34.51 on QQQ), and QQQ volume was significantly higher than the overall NASDAQ. It too managed to check its fall at the 18 day EMA on the close.
SOX broke down hard from the 18 day EMA as chip stocks sold across the board on rising volume. A major drag on NASDAQ.
S&P 500/NYSE
Large caps managed to hold the 200 day SMA on much lighter volume. Its energy and financial issues managed to hold it up nicely.
Stats: +0.09 points (0%) to close at 1113.63
NYSE Volume: 921.595M (-17.6%). Big drop in volume as the index eased back to test the 200 day SMA. Still showing solid price/volume action albeit at a lower overall level. We will see if it can hold this action when the real volume comes back to the market this week. That techs and semiconductors make up less of its weighting is something it has going for it.
Up Volume: 377M (-554M)
Down Volume: 533M (+367M)
A/D and Hi/Lo: Decliners led 1.42 to 1. Very modest breadth, matching the very modest downside move.
Previous Session: Advancers led 2.57 to 1
New Highs: 161 (0)
New Lows: 15 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps gapped lower, rallied back to positive, but tailed off at the close. Basically everything outside of technology held up decently and SP500 settled down on the 200 day SMA (1112). Volume backed off so there was no distribution in the large caps or small caps. Very solid session given all of the news, and but for the NASDAQ and tanking SOX, we would consider it in good shape. Still is, but there are other forces at work that may impact it this week when the managers get back into town.
SP600 experienced a modest pullback as well, backing off from 287 resistance without really testing it, but holding well above 280 and the 200 day SMA (278). A good job of rebounding in the head and shoulders pattern, but it is still below both the left shoulder peak and the head.
DJ30
Similar to SP500 the blue chips managed to turn positive late in the session, and though they could not hold the gains, they managed to hold near the 200 day SMA (10,264) on the close. Unlike SP500, volume surged. Of course, INTC is part of DJ30, and its volume was 2.5 times average, helping pump up the index' overall volume. Higher volume intraday reversals are never good. It managed to hold near the 200 day SMA on the close, a positive that mitigated some of the intraday turn.
Another mitigating factor is the rise of DJ20, the Dow Transport index. It is working toward the early July high. The Transports make a good one-two punch with DJ30, and the fact they are performing well typically bodes well for DJ30. Of course now DJ30 has to deal with its newer technology components, a slight alteration of the traditional relationship between transports and industrials.
Stats: -30.08 points (-0.29%) to close at 10260.2
Volume: 215 million shares Friday versus 181 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
September is a month packed full of intrigue. Historically the worst month for stocks, and other than 2003 when the market was pricing in the strong recovery surge initiated by tax cuts and tax incentives, the direction has been sharply down the past four years. That often, however, sets the stage for a rally to year end. With the added incentive of expiring tax breaks for businesses, the fourth quarter should be pretty strong as businesses spend to take advantage of those incentives.
This is the first week of the month, and it comes after a low volume move off of lows of the year. There is still the possibility that SP500 moves sideways here and forms a 5 month double bottom with handle base and ultimately breaks out without another test. Sentiment indicators never reached extreme levels on the last leg lower, the market is just now starting to show good price/volume action and some leadership, volume has been quite low on the move higher, oil prices are back to rising and still above $40/bbl, and VIX is back at 14. In short, there is not the usual indicia in this rally that support a sustained move.
This week we are thus on the watch for higher volume selling. We are looking at downside positions, getting ready for a drop. We have moved up stop losses on all of the upside positions, ready to close them out of they start lower on overall rising market volume. Some of the positions will hold up better than others; certain sectors and stocks that are going to be the leaders after the next test is over. We have attempted to move into just those stocks showing the potential to be those leaders, but invariably some that look good won't hold up in a sell off.
Again, the market may hold here and rally on. If it does it will have defied the odds, rallying when sentiment indicators never reached extremes and when the first three weeks of the rally were on very low volume. We don't expect it to last, but we will let the market show us the direction and be ready to take what it gives.
End part 1 of 3
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