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9/09/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: ERES; CLF; DO
Buy alerts issued: WITS; CTSH; AAI
Trailing stops issued: URBN; AEOS
Stop alerts issued: RL; PHRM; POOL; MCIP
SUMMARY:
- Investors relieved TXN news not worse, NOK outlook better, sparking higher volume rebound.
- Jobless claims tank due to hurricanes, wholesale inventories rise as sales fall.
- Breadth narrow as techs, chips rebound with help of short covering while steel and oil leaders surge again.
- Subscriber Questions
Stocks rally back but move is narrow.
Volume jumped back above average for the first time in a month on both NYSE and NASDAQ as stocks met the Wednesday distribution with some accumulation. A good response to a deteriorating situation, one that could have turned worse with the very lukewarm guidance TXN provided after the Thursday close. Stocks responded to the bad TXN news with relief that it was not worse (it appears the INTC guidance last week had investors fearing the worst, though TXN's guidance was really bad) and focused on the good news, i.e. NOK increasing its Q3 sales guidance and overall outlook. Of course this comes after NOK lowered guidance the prior 2 quarters and was hammered because of its lack of new phones with the features consumers wanted. If you disappoint enough, if you finally say things are better and do it at the right time, even a laggard can generate some excitement.
The rising volume was a good response the distribution, but we cannot get too caught up in the hype of the chip bounce as some were doing after hours. Volume was centered in a few sectors Thursday: semiconductors, some technology, oil, steel. The first two have lagged; the latter have led. Overall market breadth was narrow as most of the large caps and non-chip NASDAQ stocks went basically nowhere. The narrow upside breadth indicates that the laggards were moving in a short squeeze, with SOX rebounding back to the 18 day EMA. Maybe this time it moves up to the 50 day EMA near 400 as it has made 4 bounces downward below the 18 day. After a move such as that stocks or indexes typically come up for air at the 50 day EMA before resuming the trend.
Volume was up on the move, and some were viewing that as accumulation. There may have been some long term buying ongoing, but a lot of the volume involved short sellers trying to get out. That drove the volume sharply higher on the semiconductors. Volume was also up in the steel and oil stocks as they broke out once more. They are leaders, not laggards. Their volume involved long term buying as the rally in those stocks continues. It is possible that this was a turning point for semiconductors; some really strong volume moves Thursday jumped key stocks (e.g. KLAC, AMAT, TXN) up to the 50 day EMA in one session. We are looking at some of them closely as they could provide some upside gain even if they don't breakout. Many of them are still in severe downtrends but we could see a tradable move here.
All in all it was a decent upside response to some distribution that was starting to erode NASDAQ. Sure there was short covering in techs and chips, but there was also some longer term buying as well. Once more the market reasserts its upside bias on this move though it still has to beat near resistance that again held it in check in the last hour.
THE ECONOMY
Jobless claims dive to a meaningful level, but the meaning is the weather.
Jobless claims for last week fell to 319K, down 44K from the prior week. Outside of last week we had previously noted that claims were getting to a level that would indicate employers were starting to hire more. We saw some of that in the August jobs report, but as of yet not enough. Thursday claims tanked down close to 300K. If you recall Fed comments back in 1998 and 1999, it lamented the fact that weekly jobless claims were falling close to 300K. At 300K the Fed felt the labor market was too tight and that could lead to something the Fed called 'wage-led inflation.' The idea is that if the job market tightens enough, the employees gain the upper hand and can demand higher and higher salaries or wages. Then they go and use that extra money to bid up the prices of goods and services. Voila. Inflation.
This is another Fed theory that has, you guessed it, no historical evidence to support it. Just a notion and some more Fed 'research' or 'study' that the Fed has never felt the need to release to anyone not on the hallowed board. In any event, the Fed was using the 300K claims level as one of its many reasons for raising interest rates. It was not inflation, and it was dubious if it would lead to inflation, but the Fed felt that it could. Think of the Scott Peterson trial. There is no direct evidence, only circumstantial. To reach a guilty beyond a reasonable doubt verdict the jury will have to string together several inferences. The Fed was using the jobs report in such a manner to infer that inflation was coming. As it turned out, the only thing coming was a monumental market collapse with trillions of dollars in retirement lost because the Fed felt that there just might be some inflation down the road at some point. That is what the 1929 Fed thought as well. Both the 1929 and 1999 Fed avoided inflation, though the two worst market collapses in history were hardly an equitable trade with some possible inflation (inflation that had not shown itself at all).
That is a long-winded discussion of jobless claims and their meaning. The Fed views them as an indicator of potential inflation. Our view is that they provide some leading information as to the jobs market. The low numbers this week were encouraging, but they were the result of the hurricanes. The prior week was higher because of the weather. The actual number is in between, near 330K. That is not bad. That is getting where it needs to be to show much better job creation underway.
Wholesale inventories rise but sales fall.
This is one of those indicators that is reported and then it is up to the pundits to figure out if it is good or bad. At the beginning of the year economists wanted inventories to rise; that would supposedly show companies building up inventories to meet demand. Now they are viewed as an indicator of flagging demand: fewer buyers leave inventories piling up. There is some merit to the latter position. July inventories rose 1.7% (0.7% expected). Sales rose just 0.5% as strong machinery and computer equipment sales offset weak apparel, groceries, hardware and electrical products. Auto sales fell 2.6%, the largest since January, and contributed to a 2.3% rise in auto inventories. The lower sales pushed the inventory to sales ratio up to 1.6 months from 1.5 months in June.
The report was from July, and we know July was another one of those 'soft patch' months. We also note that auto sales made up a large part of the rise. As we have seen over the past year, auto sales are up and down month to month. Machinery and PC equipment sales are still solid. When auto sales rebound with new incentives, inventories will decline again.
THE MARKET
Volume jumped above average Thursday as NASDAQ worked to recover from some recent distribution and semiconductors rebounded sharply in their downtrends. Small caps were on the rise as well, second in leadership behind the chips. The large cap indexes, however, were basically flat. It was a solid answer to the recent weakness in technology, but as the techs benefited the large caps did not. Breadth was narrow and the laggards were leading the moves, suggesting much of the action in those stocks involved short covering. That makes it hard to call the session an overall success, but given the recent signs of distribution in technology, it was another sign the market is not ready just yet to roll over, particularly with leaders in oil and steel and other scattered areas still moving higher.
The indexes still struggled at near resistance. SP500 cleared the 2004 down trendline but stalled below resistance at 1125 and faded to close back below the downtrend. The small caps rallied well, but they too failed their most recent run at 287 resistance. NASDAQ closed just over both 50 day MA, but it too came back off of its high and hung on to the close; hardly a confident move.
Despite its shortcomings, however, stocks did not roll over after a bit of distribution, and the laggards made some solid gains on strong trade. The indexes did not give up support and are still being squeezed between support and resistance, still in position to provide an upside breakout if the buying continues. We still don't think the conditions for an ultimate breakout from this base have been hit, but as we have said in the past, the market dictates the action. We remain cautious as this looks like short covering in a continuing downtrend without the requisites of a true bottom. That does not mean stocks won't rally further on this move, getting closer to those levels we set out in mid-August as the tops. Specifically, 1125 to 1130 on SP500, 1900 to 1950 on NASDAQ. Without the other indicia of a bottom, even that rally would be suspect unless there was powerful accumulation. As always, we will take our cue from the market and take what it gives.
Market Sentiment
VIX is still at 14, the level that has triggered all of the pullbacks in 2004.
VIX: 14.01; -0.05
VXN: 20.58; -0.7
VXO: 13.75; +0.05
Put/Call Ratio (CBOE): 0.91; -0.14
NASDAQ
Broke over the 50 day MA and managed to hang onto that level on the close on rising volume. No breakaway move yet, but a good answer to the distribution.
Stats: +19.01 points (+1.03%) to close at 1869.65
Volume: 1.673B (+14.27%). Volume jumped above average for the first time in a month. After the distribution it was a good response. Undoubtedly some of the volume increase was short covering in the chip and tech issues as short sellers scrambled to unload downside positions. Many chips did show very strong volume on the rebound, indicative of short covering but also some upside buying.
Up Volume: 1.302B (+725M)
Down Volume: 313M (-539M)
A/D and Hi/Lo: Advancers led 1.83 to 1. Decent breadth as the chips joined in.
Previous Session: Decliners led 1.68 to 1
New Highs: 83 (+7)
New Lows: 37 (-13)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Bounced off of support at 1850 it found again Wednesday, rallying over the 50 day MA (1869 EMA, 1868.58 SMA) and hanging on to the close. Hardly a clear breakaway move. NASDAQ was finally helped by a SOX rebound with many chip stocks rebounding on strong short covering volume and thus boosting overall NASDAQ trade. NASDAQ showed some bullishness again just as it was starting to wobble, and it held the up trendline once more and is ready to challenge the next resistance level. The move is still lateral, and with the Thursday bounce the day to day volatility remains as well. If SOX continues to contribute, NASDAQ will break through this near resistance and move to challenge 1900 to 1925. Looked as if it was ready to fade as distribution increased, but the chip move was very strong, short covering or not.
NASDAQ 100/QQQ rallied over the 50 day EMA as well, moving on above average volume. Facing the same resistance as NASDAQ ahead, they are set as well to move up to that resistance if this volume remains and semiconductors continue to participate to the upside.
SOX is still in the 2 month downtrend below the 18 day EMA, rallying to tap that level on the high before backing off on the close. Volumes were very strong on the move so this may be the point where SOX moved up toward 400 and the 50 day EMA, something of a relief bounce after a 130 point decline from July to September 8.
S&P 500/NYSE
The large caps were mostly left out of the picture Thursday, managing a small gain and remaining squeezed between support at the 200 day SMA and resistance at the 2004 down trendline.
Stats: +2.11 points (+0.19%) to close at 1118.38
NYSE Volume: 1.367B (+9.68%). The first above average volume in a month as large cap stocks held their lateral move this week, continuing to work along the 200 day SMA. A good response to the Wednesday distribution session as SP500 continues to show mostly positive price/volume action.
Up Volume: 844M (+422M)
Down Volume: 510M (-300M)
A/D and Hi/Lo: Advancers led 1.55 to 1. Very anemic breadth, but SP500 posted a very modest gain. The small caps were the better mover on the session; with the large caps steady, however, the small cap strength was somewhat neutralized.
Previous Session: Decliners led 1.45 to 1
New Highs: 142 (-13)
New Lows: 10 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Moved up to the 2004 down trendline (1118.50) early, but stalled and sold back to support at the 200 day SMA (1113). It managed another bounce, this time clearing the down trendline and moving to 1121. Once more, however, the move could not hold, and by the close SP500 had returned to close back below the down trendline. Volume was up as it too responded decently to the Wednesday distribution. Thus far it refuses to breakdown either, though we note that it is slipping into that volatile lateral move same as NASDAQ. Showing the same resilience that got it to this point all during this rally. 1125 continues as key resistance for the index; we did not expect the index to get much farther than this during this rally. For the most part we liked the upside action we saw Thursday, but as with NASDAQ, it still has not shown the credentials of a typical bottom in this base.
The SP600 rallied to resistance near 287 as the small caps were one of the leaders Thursday. As with most of the indexes it was unable to hold the move to the close.
DJ30
Blue chips were under some pressure, selling back to test the 200 day SMA (10,274) on the low. Volume was strong once more, but there was no major sell off on DJ30. It did show its third mild distribution session in the past 4; if DJ30 was more of a leader we would be concerned. As it is, the index is holding important support, trying to set up for a bounce toward 10,500, the level we saw it reaching on this leg before it ran out of gas for a deeper test.
Stats: -24.26 points (-0.24%) to close at 10289.1
Volume: 223 million shares Thursday versus 222 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Thursday stocks preferred to overlook bad news regarding new terrorist tapes, earnings warnings and somewhat dated July economic data in favor of a 'glass half full' mindset. That resulted in a big short covering rally in semiconductors, but there was also some longer term buying of this beaten up sector. Friday stocks will have another round of economic data to chew on with the PPI and trade deficit.
While Thursday was a positive response to the prior distribution, we are still of the mind that stocks will have to show us they mean business about another significant leg higher in this rally. Through Wednesday stocks were weakening some. Strong volume Thursday is a better sign but it also involved short covering in laggard sectors. Practically all of the indexes are at some important resistance that they have yet been unable to crack. Breaking through that level and holding onto the gain on continued strong volume would be a very good corroboration of another leg higher. Until that happens we are not forgetting the distribution, volatile lateral NASDAQ move, low volume on the move up, or the lack of significant sentiment readings at the last low.
We remain open to being proven wrong. Indeed, another upside move would put the indexes at our original target levels for this rebound, putting them in a somewhat overbought position. If volume does not keep pace we will still be skeptical of the overall move and still watching for the next signs of a waning move that could take us down to a September/October bottom.
At the same time we continue to find solid upside movers as well as stocks setting up for a ride back down when this move is over. We continue to keep a tight rein on upside positions given there has been no clear break higher through the current resistance levels. That can bite us on some plays, but at this juncture we still prefer to preserve some gain in hand than risk losing it.
Support and Resistance
NASDAQ: Closed at 1869.65
Resistance:
May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The March 2004 lows (1897 - 1989)
The 2004 down trendline at 1918
The 200 day SMA at 1968
Support:
The 50 day EMA at 1868.94
The 50 day SMA 1868.58
The October 2002/March 2003 up trendline at 1848
The 18 day EMA at 1847
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 1118.38
Resistance:
The March/April down trendline at 1118.50
1125 was key price support and has been acting as resistance.
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 200 day SMA at 1113
The 18 day EMA at 1105
The 50 day EMA at 1103
1096 to 1100 represent price support.
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1062 - 1058 from November 2003
Dow: Closed at 10,289.10
Resistance:
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 200 day SMA at 10,274
The 18 day EMA at 10,183
The 50 day EMA at 10,150
The February/April down trendline at 10,055
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.
September 8
Consumer Credit, July (3:00): $10.9B actual versus $7.5B expected and $4.3B prior (revised from $6.6B)
September 9
Export Prices ex-ag., August (8:30): 0.4% actual versus 0.6% prior
Import Prices ex-oil, August (8:30): 0.4% actual versus 0.1% prior
Initial Jobless Claims, 09/04 (8:30): 319K actual versus 345K expected and 363K prior (revised from 362K)
Wholesale Inventories, July (10:00): 1.3% actual versus 0.6% expected and 1.1% prior
September 10
Trade Balance, July (8:30): -$51.5B expected and -$55.8B prior
PPI, August (8:30): 0.2% expected and 0.1% prior
Core PPI, August (8:30): 0.1% expected and 0.1% prior
SUBSCRIBER QUESTIONS
Q: With relationship to charts could you tell me your thoughts on "GAPS". Do gaps have to be filled?
A: There is an old adage that all gaps must be filled. We know that a stock can't run up (or even sell) without having to come back and test some support (or resistance). Often when this happens a stock or index will work to fill a gap on a normal consolidation of the gains. Ultimately most gaps will be filled, but it can be months or years later in strong moves. As an example, back in 1998 the market gapped up but did not fill the gap until the September 2001 low, and it did not sell just to fill the gap the move back down was part of a much larger market collapse after an historic run up. The market didn't "seek the gap" but just sold through it as it went lower. Consolidations are normal after any strong move and don't necessarily result from a gap. Sometimes the consolidation will be a full test of the gap or sometimes just a partial test. Whichever it may be, waiting during a strong upside trend for a stock or index to completely fill the gap can result in missing some remaining upside moves.
End part 1 of 3
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