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us stock market, top stock pick
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9/08/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: PTEK; JBLU; PMTI
Buy alerts issued: POWI; STLD; PXLW; ERES; SCSC; SKX; SVU
Trailing stops issued: ISRG; TRA; GENZ
Stop alerts issued: DGX; CLE
SUMMARY:
- Greenspan fails to inspire investor confidence and bullish intraday bias fades.
- Expansion regains traction even as more companies warn.
- House Budget Committee testimony showcases posturing, obsessing over deficit.
- Intraday volatility increases as rally pace slows, distribution creeps in.
- TXN is latest to warn, hints others may do same.
Stocks try to continue bullish bent, but fade to the close.
Stocks started the session slower and then started back up, much as they have done this entire rally. That is solid bullish action: buyers use a dip as another opportunity to enter, and they run prices higher to the close. Stocks were on track again, but just as they were testing the next resistance levels Greenspan's speech text hit the wire. It failed to boost investor confidence even with its reference to the end of the 'soft patch' and the expansion finding new footing.
Stocks flip-flopped, bouncing down from that resistance to the support. A couple of attempts to rebound from support failed, and the indexes again found themselves in a relatively narrow range between next resistance and close support. Not bad action, but not as bullish as displayed during most of this upside move.
If it were just the pullback we would not be too concerned. In addition to this there is the increased day to day volatility, particularly on NASDAQ, as the rally starts losing its upward momentum. Moreover there is some subtle distribution occurring in NASDAQ. Separately it is not much. Altogether it is not a flashing red light, but it is in line with what we were anticipating for this low volume move: early surge, the move starts to slow, volatility increases, distribution creeps in, VIX fades. That sets up another test lower. Thus far stocks have staved off the selling. Maybe they can just rally on up from here. There are flashes of strength, but volume has continued to lag and even reverse some of that good price/volume action on the way up. All of these factors combined have us closely watching any signs of weakness on upside positions.
THE ECONOMY
Greenspan sees traction for the expansion.
Greenspan talked of a soft patch over the past several months but Wednesday was signaling better times. He specifically noted the "expansion has regained traction," and would be performing even better if oil prices were lower. He does have a way to state the obvious in not so obvious terms. Another example: inflation has eased despite the increase in oil prices. Did anyone other than the most died in the wool inflation hawks believe otherwise? Energy-led inflation is just about the biggest misnomer ever created. Higher energy prices don't lead to inflation. They skew overall prices higher and higher as they rise higher and higher, but it is a rise based solely on energy prices. How so? Because very high oil prices have historically led to slowing industrial output, consumer consumption, and even recession. Unless stagflation sets in, slowing economic activity leads to lower prices. Energy spikes thus rarely lead to inflation and more often lead to lower prices. Accordingly, Greenspan's statement was nothing earthshaking.
Certainly the market did not think so. Stocks sold all session after the text was released. Treasuries rallied on the text. Apparently investors were reading between the lines, noting that this text was not nearly as ebullient as his prior speeches. Greenspan has said the economy had hit a soft spot but expected growth to resume. His comments Wednesday were in line with that train of thought. He has also previously described the economic growth as robust. An economy that has 'regained traction' is not necessarily robust. Thus the less than enthusiastic response.
What we have is what the leading data are telling us: an economy that is expanding, but one that is doing so at a slower pace as the impact of higher energy prices siphon funds away from consumers and businesses and is just another factor that causes them both to put some plans on hold until there is more clarity. The weekly leading indicators show the same: overall things remain solid, but a resumption of the 2003 growth pace is not in the cards, particularly in 2005 after a late spurt in 2004 as businesses take advantage of the remaining expiring investment incentives. Not a glowing report, but if oil can slip back below $40/bbl and stay there, confidence will pick up.
Never have so many vowed to do so much yet do so little over something that is not as terrible as claimed (i.e. the deficit).
Greenspan's text and the Q&A after his statement were rife with issues regarding the deficit and how all of the federal spending can possibly continue in face of $400B and more of red ink. Greenspan has cited the need to curtail spending, sunset programs, and reinstate 'pay-go' limits. The Congressmen and women were all, repeat all, more than eager to stake their claim to being fiscally responsible. After listening to the litany of spending condemnation one would believe Congress would soon have the overspending problem solved.
Now that the laughter has died down, we realize it is folly to believe that any kind of agreement can be reached by Congress on what to cut and what not to cut. Indeed, Congress never cuts. It just adds to spending and then labels anyone who complains as part of the deficit problem. Spending should be cut. There is nothing in the Constitution that says Congress can levy taxes in order to force workers to pay for the retirement, healthcare, and housing of others. As Jefferson, Madison and others wrote, those are reserved to the states where they can be strictly controlled by the local populace. For now, that is not going to happen. But is there real reason for concern?
Wednesday one would have concluded (in addition to all there being spending hawks) that the current deficits will lead us to the gates of economic hell. "Record" deficits are supposedly going to bankrupt social security, burden our children for the foreseeable future, and assuredly taint Mom, apple pie, and the American way.
Indeed some are using this as a way to attack everything from tax cuts to fighting terrorism to free trade. Are deficits that horrid? Over twenty years ago there was a raging debate about deficits and how they would destroy our country. There was also a counter view that deficits were not the death blow to the economy in and of themselves. I actually had an enlightened finance professor and one of my texts actually contained a chapter titled "Do deficits matter?" (or something close; lots of brain cells have been lost in the intervening period). Well, do they?
Deficit hawks say they will lead to higher interest rates, 'crowding out' the small and business investor, thus ultimately damaging the economy as small businesses cannot make the investment needed to grow business. Greenspan reiterated his belief in this theory Wednesday. We can only think of one problem with this theory: it has no historical evidence to support it. If you track interest rates and deficits, there is not one period in history where the empirical evidence supports the idea that deficits lead to higher interest rates. Greenspan refers to "Fed research into the matter" but has never provided that research or the evidence it is based upon. It is pure theory, one that has yet to have the right circumstances occur to prove it. Indeed, history disproves it, much as with the Phillips Curve and its hypothesized relationship between employment, economic growth and inflation.
Are we at the point where deficits finally get so high this theory works? Many would have you believe we are there. Here are the facts. This is not a "record" deficit. When you look at real dollars adjusted for inflation, it is no record. Deficits have been higher in real terms in the past. Indeed, during WWII the deficit was much higher than it is today while we are fighting a global war on terror. We are not saying the two wars are the same, but you get the idea: 9-11, the increased cost of security at home, the cost of Afghanistan, Iraq and other terror fighting activities are all a big drain on the economy and cost a lot of money.
Second, as a percentage of GDP this deficit is a laggard. This is the true measure of deficits as it puts them into context with the overall economy. If you make $200K per year, a $20K deficit is 10% of your income. If you make $40K per year, a $20K deficit is 50% of your income. Huge difference. This year the deficit is forecast at 3.6% of GDP. Since 1985 there have been seven larger deficits measured as a percentage of GDP. During that entire time, interest rates fell as deficits rose. Interest rates started to rise as we used more of our available funds to pay down the debt as opposed to putting that money back into the economy.
Looking longer term, even the deficit hawks agree the deficit will shrink. The current deficit is lower as a GDP percentage than other periods in the past 19 years when interest rates were falling even as deficits grew. If you look at the estimates of the deficit over the next 10 years, the 3.6% this year falls to 2% by 2010 (we don't necessarily put any stock in these numbers, but these are the numbers the deficit hawks are using, so we will use them). The average deficit as a percentage of GDP over the past 35 years: 2.4%.
Thus this record deficit is not really a record when viewed in real dollars, and it is nowhere near a record when viewed as a percentage of our economy. No record deficits, no interest rate increases other than those prompted by anticipation of Fed rate hikes. What is the uproar about? Oh yes, it is an election year and we are being dazzled by many versions of the 'facts.'
THE MARKET
NASDAQ is starting to look more like June with its advance turning more lateral than up and some distribution creeping into the picture (2 of the past 3 sessions). SP500 still looks good overall as it sits on top of the 200 day SMA, but it too suffered a distribution bout Wednesday. At the same time VIX hovers near 14, a level that has sparked sell offs in March, April, June and July. Intraday action turned a bit bearish.
Not the weakest market, but with a low volume rally, some distribution and negative guidance can start the beginning of the end of the current move. The distribution is somewhat sneaky. Volume has been below average on the move higher, and when we see some below average volume distribution, alarm bells don't necessarily go off. Friday was one of those sessions. With the Wednesday trade, however, it is time to take note. It is not the death of the rally, but with the low VIX, NASDAQ struggling below the 50 day EMA, and more and more earnings warnings, it is getting beat about the head and shoulders.
Again, SP500 is still in decent shape, and the small caps look decent, though we note they failed at some resistance Wednesday as well. The market may shake off these signs and rally further in an 'election' September, but unless things change appreciably, that only sets up a worse fall later. We will play it either way, taking our cues from what the market and leading stocks show us, but we are watching volume closely and will not let upside plays get out of hand in these conditions.
Market Sentiment
VIX: 14.06; -0.01. Hovering near 14, the level that has set off several selling bouts this year. On some occasions it takes a week or so at this level.
VXN: 21.28; -0.16
VXO: 13.7; +0.12
Put/Call Ratio (CBOE): 1.05; +0.19. Contrary to the VIX, a close over 1.0 indicates continued pessimism about the future of an advance. Three closes above 1.0 in July helped set that rally going. At this stage we are watching this indicator, but after a rally it is not as key an indicator. It does show that pessimism remains somewhat high, and if it does, that can further fuel the upside move even if it is getting winded.
NASDAQ
Tapped the 50 day EMA on the high once more but then faded, and it did so on rising volume, the strongest in a month.
Stats: -7.92 points (-0.43%) to close at 1850.64
Volume: 1.464B (+10.46%). Significant rise in volume, the highest in about a month. Still below average, but the second distribution session in the past three. These low volume distribution sessions can be insidious as you can rationalize them away. When overall volume is low, however, they cannot be ignored if they start springing up in quantity.
Up Volume: 577M (-273M)
Down Volume: 852M (+406M)
A/D and Hi/Lo: Decliners led 1.68 to 1. Very modest. Flip-flopping with Tuesday.
Previous Session: Advancers led 1.68 to 1
New Highs: 76 (-20)
New Lows: 50 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continues to struggle below the 50 day EMA (1896) and the 50 day SMA (1872) as volume starts to rise. Tuesday volume was up and NASDAQ scored a gain; it was not a great move, however as the index traded all over the board and finished mid-range. It is holding above the 18 day EMA (1844) and the October 2002/March 2003 up trendline (1846), getting squeezed between the two. Solid move off the August lows on into late August. Then it started to bounce up and down, showing substantial upside and downside moves one after the other. It is narrowing in its range and is going to give us a break one way or another. The rising downside volume is a concern after a low volume rally. That is the main sticking point with this move, and it is similar to the May to June rally. Watching closely for distribution that takes it below near support.
NASDAQ 100 and QQQ show two dojis below the 50 day EMA on rising volume. As with NASDAQ overall, the indexes are being squeezed below that resistance and above the 18 day EMA. A bit of distribution is something to be cautious of.
SOX started down again but the losses are modest. It appears to be trying to set up for another bounce up to the down trendline after the Friday tank on the INTC news. TXN was being treated well after hours, but the news for chips was in no way good. Chips may get a rude slap in the face Thursday.
S&P 500/NYSE
Failed at the down trendline again and showed its first distribution session this rally. One day of distribution is no real concern, but with NASDAQ showing two such sessions it makes us take note.
Stats: -5.03 points (-0.45%) to close at 1116.27
NYSE Volume: 1.247B (+2.72%). Volume rose closer to average, but it was on a downside session. NYSE's first distribution session on this move; that is not something we are getting too worked up about as SP500 is trying to be a leader and thus far is not showing the same stress as NASDAQ.
Up Volume: 422M (-466M)
Down Volume: 810M (+500M)
A/D and Hi/Lo: Decliners led 1.45 to 1. Very modest downside breadth. Small caps were the culprit as they led to the downside.
Previous Session: Advancers led 2.73 to 1
New Highs: 155 (-65)
New Lows: 16 (+1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied past the March/April down trendline (1119) to 1123, but failed below some price resistance at 1125 and closed below both resistance points. It continues to hold above support at 200 day SMA (1113) as it steps laterally showing, until Wednesday, solid price/volume action. Wednesday NYSE showed its highest volume in four weeks, and it was to the downside. In other words, since the initial sessions of the rally volume has been lower than Thursday's distribution session. The key to this move is whether SP500 holds the 200 day SMA or if it cuts that level on even stronger volume. It could step laterally here over the 200 day on lower volume and form a nice handle to a rather elongated 'triple' bottom. While we don't necessarily like the action we see in the market overall and believe there is a strong chance it falls further, we are not going to blind ourselves to what this index is showing. Thus far a nice move with a day of distribution as it takes a breather following a break through its 200 day SMA.
Led to the downside on a percentage basis after leading on Tuesday. It tapped resistance at 287 and fell back on that rising NYSE volume. Not a major reversal or breakdown, but we note a day of distribution as it tested the next resistance level.
DJ30
DJ30 posted its second distribution session in three along with NASDAQ, one day after the bounce off the 200 day SMA (10,270). It is still trending higher and is not showing much lateral movement. It tested its initial move off the August low to end August, and has rallied since on rising volume. The only offset are those two above average volume distribution sessions. Neither of those were big sell offs. All in all DJ30 has suffered the tech problems well, continuing its move higher.
Stats: -29.43 points (-0.28%) to close at 10313.36
Volume: 222 million shares Wednesday versus 204 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The after hours news was dominated by TXN lowering its guidance while upping its earnings guidance. The latter was based on a better tax rate and a recognition its capital investment would be lower than expected to end the year as demand was lower. Cell phone chips were down, something TQNT noted as it warned earlier. Nonetheless, TXN and other chips were higher after hours. This might be one case where the after hours reaction will fade in the light of a new session.
NASDAQ has a lot of our focus as it is being squeezed between support and key resistance while showing a couple of sessions of distribution. It is feeling the SOX drag and the weight of several earnings warnings that started with INTC last week. How it breaks will influence the rest of the market.
We are not ignoring SP500. It showed some distribution and again failed at the 2004 down trendline. It is still very much in its uptrend from the August low, however, not yet starting the lateral move NASDAQ shows. Overall it still looks good, and many of its components are in the health, drug, basic materials, and industrial sectors that are outperforming technology. That gives it a better leg up, and those industrial, health, etc. stocks are still in good shape.
That leaves us looking at good stocks in those sectors as potential upside plays, but we continue to seek quality moves. If a stock rallies but volume is weak, we will most likely pass it up; given the start of some distribution, warnings, etc., this is not the time to chase upside positions unless they are solid moves from solid entry points.
We continue to look to downside positions as well, particularly in those areas already suffering and ready to continue the move lower. The warnings are taking their toll along with the distribution; in short, there are signs of a breakdown from this low volume rally, and moves lower can be quick and sharp when it occurs.
End part 1 of 3
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