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money investment, investment help
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9/18/04 Investment House Alerts Report
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IH Alert Subscribers:
NOTE: Part 3 containing new plays will be emailed later today.
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: WBSN; WCN; TXN
Trailing stops issued: OCAS; CSAR
Stop alerts issued: AGN
SUMMARY:
- Stocks end the week steady, holding over support, below resistance
- Preliminary Michigan sentiment appears way off, again.
- Fed on stage this week as it faces a slowly expanding economy.
- Subscriber Question: Weekly jobless claims versus monthly non-farm payrolls.
- Stocks hanging tough over support, showing bullish bias. Still time to be wary.
Expiration session gives its usual impossible read. At least nothing changed.
Stocks ended the week testing holding support, testing resistance, and closing in between, just as they did Tuesday through Thursday. Monday was the big day when the indexes moved sharply higher. After that it was up to resistance, down to support, back up to resistance, etc., closing out the week in that narrow range. Basically a one day week. After Monday stocks held their gains but could not advance. Depending upon your view of the market right now (i.e. bullish or bearish) it was either setting up for the next break higher or struggling to hold on as NASDAQ, SP500, and SOX failed to take out key resistance.
Stocks had some more bad news to overcome with QCOM promising a good Q4 but then saying it would change its royalty accounting. QCOM was not talking about accounting irregularities, just choosing how it would book royalties between accounting methods. It was a timing thing. Investors were spooked nonetheless and QCOM was sold, impacting the pre-market futures trading. Stocks overcame that on the open and rallied. Then the preliminary Michigan sentiment report came in well below expectations. Also, the German government issues an 'urgent' call to all German citizens to leave Iraq. Those jolted the market, killing off the early rally attempt.
Stocks came right back. SP500 rallied through 1125 and up to 1130, showing the same resilience that has resurfaced again and again in this rally. It held the gain, moving laterally and slightly lower all afternoon until a bounce in the last 90 minutes. That closed stocks near session highs. Volume surged on expiration. Breadth was narrow. Small caps closed negative. That shows the volume was a large cap shuffle on expiration. In the end expiration ended basically where it started, indeed, where the prior three sessions started.
That left stocks in decent position and acting pretty good as well. Some distribution Wednesday, but Friday they were right back up, holding the gain for the week. Again, continued resilience. At the same time it is mid-September, NASDAQ, SOX and even SP500 are below important resistance. The rally has retraced losses to points we saw as potential problems back when the move started. The sentiment indicators never reached levels typically associated with a definite bottom. That does not mean it cannot continue to rally from here; when it does fail, however, the payback will be rough.
THE ECONOMY
Preliminary September Michigan sentiment well below expectations.
We usually do not get too wound up about this report, indeed we often don't feel it is worth covering. Yet, the market attaches significance to it as seen Friday when stocks sold on the news, stalling the morning rally.
Sentiment was reported slipping to 95.8 from 95.9, well below the 96.7 expected. Current conditions fell from 107.9 to 105.8. Expectations rose to 89.4, from 88.2. This is the trend seen in confidence the past few months: current slips as the recovery fails to reignite to 2003 and early 2004 levels while expectations for the future remain positive.
What does this mean? Damn little. First, consumer sentiment and consumer actions rarely correlate. Consumers often say one thing and do the other. For the past few years that has exactly been the case. Consumers were worried but kept consuming. Indeed, consumers always consume until they start losing jobs. That is when they cut back. With consumers believing more jobs are coming, they are not going to stop buying. Only when confidence numbers are much lower do you actually start seeing a correlation between confidence and consumption. Think of it in the same terms as sentiment indicators: they don't mean much unless they get to extremes. Then it is time to take note.
Fed meets Tuesday, will raise rates, does not need to.
Friday we heard some commentators opining the Fed may hold off raising rates Tuesday. It would not be a Fed meeting without this kind of absurd speculation. Hope springs eternal. The Fed can't avoid raising rates and it won't avoid raising rates. It cannot because it has been talking about inflation being a problem and a return to expansion as the economy finds 'traction' after its 'soft patch.' That was just two weeks back and from Greenspan himself. Maestro cannot go back on his testimony to the Budget Committee. Further, once the Fed gets its mind set that it needs to hike rates or cut rates, it always acts too late and then acts too long. In this world timing is everything. Unfortunately, the Fed uses a sundial in the digital age.
Thus the Fed will raise rates 26 basis points when it does not need to. The economy is indeed picking up a bit of steam once more, but it is hardly surging. The real indicia of economic expansion, e.g., the ECRI report, is still showing a moderating rate of expansion. Not a lot of traction showing up there yet. Yet, the Fed has embarked upon a rate hiking campaign, and it won't stop with just 50 basis points under its belt. It will need the third one so in its own mind it has substantiated the need for the rate hikes. Kind of a 'see we showed you we really needed rate hikes because we hike rates' argument. I mean, could the Fed be so wrong that after two small hikes the economy is sliding? The answer is of course 'yes,' but not in the Fed's mind. A Greenspan Fed never admits it is wrong. Be obtuse, be obscure, admit nothing.
The Fed is setting up for the possibility it is ending its rate hiking. It has already issued three statements, one through Greenspan, one through McTeer, and one through Bies. Each has indicated inflation has softened and McTeer and Bies have speculated that rate hikes could be drawing near an end. The market has picked up on this, and that is probably why the beaten down large cap techs and semiconductors started rallying two weeks back, finally starting to participate in the move off the August lows. Some are looking for the Fed to hike and then change its statement to more of an 'all clear' report. We don't anticipate that is going to happen on this round. It will be up to the market to draw its own conclusions; nothing new there.
Reconciling weekly jobless claims and monthly job creation.
After the last booming jobs report, one subscriber wrote with a straightforward question: how can weekly jobless claims run in the mid-300K range while monthly payrolls rise just 100K or so, and yet the unemployment rate falls.
There are many issues impacting this equation. The unemployment rate can fall because the workforce contracts as would be employees can't find work and give up once more, discouraged. Those out of work can, and at important turns in the economy often do, start their own businesses, using and developing new technologies in new ways. Microsoft, Apple Computer, Dell and other big household tech names started this way: economy in recession, no job prospects, get an idea, pursue it, create a new industry and millions and millions of jobs.
Weekly jobless claims and monthly payrolls thus don't really play off one another. Jobs that are lost and thus resulting in new unemployment claims may be in certain sectors while the new jobs created are in completely different, perhaps cutting edge sectors. A recession comes and a big, mature company has to cut fat. It eliminates a few layers of management, etc., and realizes it does not need them, particularly with new technology. Those jobs are gone for good. New jobs are in those cutting edge areas, the new technologies or applications of existing technology in different ways.
Reconciling the two requires you to realize just where you are in the economic cycle. Right now those railing about the lack of traditional jobs being created and the loss of old economy manufacturing jobs (something that has been a very real trend for the past 50 years) while ignoring lower unemployment rate just don't get it. There was a major crash in technology. Millions lost jobs. Mass migrations out of California. It was the shakeout in a new industry that had emerged, exploded in growth, and then moved into adolescence and had growing pains. Those once new industries are now mature and laying off workers, no longer creating the millions and millions of jobs.
Instead, we are at the same point we were at in the early 1980's when the economy started that turn from Polaroid cameras to personal computers. When you look at the household survey, the number of filings for DBA's, sole proprietorships, and LLC's, you realize (if you honestly review the data) that this is the time new companies and industries are being born. They are not at the point where they are creating tremendous numbers of new jobs. They do account for the continued solid consumer sentiment about jobs as people start their own businesses and realize that they can make money and be happier away from the mother ship. Ultimately they lead to new jobs. This happens at important turns. Not every recession is like this. Some recessions are mid-cycle; when the recession ends the same jobs come right back. Major economic changes result in the scenario discussed above.
Another consideration also deals with a changing economy, specifically the changing nature of the workforce. The 1990's showed the rise of the contract worker, the temporary professional. Legal, engineering, medical, accounting; those are just a few of the professions where you can now obtain high quality contract workers. As noted, this trend started even in the go-go 1990's. After companies went under because of overhead, including large employee staffs with the associated benefits, the survivors realized they had to find another way. In this recovery the use of contract workers has expanded more than the Fed and the Labor Department allow for. Firms fear once more creating large overhead that will hurt in a downtrend.
Contract workers don't show up in the non-farm payroll numbers. There is an accounting for temporary workers, but contract professionals are not reported because the federal reporting system is mainly interested in collecting payroll taxes from the employers; they don't do that for contractors. They issue a 1099 and it is up to the contract worker to pay his or her own taxes each quarter.
These two factors have a tremendous impact upon the jobs number that many if not most miss. It is sad that the Fed is fostering the misinformation by saying that "its studies" show the non-farm number to be the more accurate gauge. Maybe it is in the typical recession. In one where we see major changes in the economy such as a hard shakeout, mature industries lay off workers, jobs move overseas, and a new terror threat changes the way we do business, we need to broaden our view and realize what the numbers show rather than try to apply a cookie cutter formula. The enlightened see what is going on; most stick to the old formulas even after the train has left.
THE MARKET
There continue to be quite a few television pundits that are just a bit too gung ho about this rally. The one we saw Friday urging caution was outnumbered at least 4 to 1. That has been the ratio the past couple of weeks. The bulls versus bears advisor survey reflects this with bulls rising and bears falling.
After all, the market looks decent. Nice price rebound and not bad technical picture. Companies are warning, but the market is moving up in the face of those warnings and soft economic data. Hope that the Fed is winding down is strong medicine as well. When the Fed stops hiking, stocks start rising if the economy still has life. Again we refer to 1984 and 1994; the market moved laterally for the year, the Fed stopped, said it was done, and the market took over. The old adage you cannot fight the Fed worked yet again.
The lingering doubts we have to do with how the rally started. There were no major extremes hit in sentiment that usually mark the end of this kind of base. The market has instead rallied back. If it moves too far it is similar to building a big office building on landfill. When the quake hits the foundation cannot hold.
The opposite view is that this is just a base in a continuing bull market that started back in October 2002. After a huge 2003 it needed to consolidate, and it spent 8 months doing so while the Fed talked of rate hikes. Now that rate hikes are potentially ending, the market is perking back up: big boom to start the economic recovery, some rate hikes to cool it, and then a resumption of the move when the Fed backs off.
In addition, there is now some leadership where just a couple of months ago there was basically nothing but oil stocks. Now we see medical (still a defensive sector though), software, telecom, electrical equipment, technical equipment, financial, and retail joining energy and metals. That is a more diverse group that has growth leadership ability. Even the beaten down large cap techs and semiconductors are starting to recover. Further, price/volume action has improved, something that is necessary for any recovery, and it is another indication the base is winding toward a conclusion.
The ultimate resolution may lie somewhere in between. The indexes are struggling a bit where we thought they would, but they are not selling off. NASDAQ has moved laterally to end the week; the indexes could continue to move more or less laterally and slightly lower for a couple of weeks and get investors once again nervous as well as allow stocks to finish forming up. That remains to be seen. Right now NASDAQ, SOX and SP500 are still below key resistance after a rebound that started on questionable legs. Despite the improvement in the action and overall condition, that keeps us wary of a further move without a more significant test.
Market Sentiment
VIX: 14.03; -0.36. Key level that has set off other selling bouts this year.
VXN: 20.13; +0.21
VXO: 13.55; -0.89
Put/Call Ratio (CBOE): 0.83; +0.08. Up on an up session, but that is attributable to expiration rollovers.
NASDAQ
Continues to work laterally over 1900 but below the ever-descending down trendline.
Stats: +6.01 points (+0.32%) to close at 1910.09
Volume: 1.655B (+24.19%). Volume surge on an up session but cannot take a real reading from this as it was a quad witching expiration. Prior to that there was the Wednesday distribution session, the third this month. In between NASDAQ showed two solid accumulation sessions where the semiconductors and large cap techs rebounded. Price/volume action has improved, something needed to break through this down trendline.
Up Volume: 1.014B (+183M)
Down Volume: 606M (+131M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Now that is modest breadth. No help from the small caps at all.
Previous Session: Advancers led 1.82 to 1
New Highs: 138 (+42)
New Lows: 32 (+11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Once more NASDAQ traded up to the January/April down trendline (1914) and down to the recent gap up point (1894) that started this last move. Volume was back above average on an upside move, but with expiration that does not mean anything. The last above average volume session was Wednesdays distribution session. Three distribution sessions broken up by a couple of accumulation/short covering sessions when the chips rebounded. The price pattern looks solid, easing laterally in a narrow range. It has to show us the breakout.
SOX rebounded off of the 18 day EMA and the hammer doji Thursday. After the strong move up the prior week it has consolidated between the 18 day and the 50 day EMA. Similar to NASDAQ, it is setting up for the next leg, but it has to clear serious resistance in the process.
NASDAQ 100/QQQ continues to work laterally below the 200 day SMA as the 10 day EMA rises to meet it. If they are going to lead they have to make the break through that level (1440).
S&P 500/NYSE
Good action as the large caps held solid below near resistance, trying to set up the next break higher with this lateral move over the 10 day EMA.
Stats: +5.05 points (+0.45%) to close at 1128.55
NYSE Volume: 1.423B (+28.14%). Volume surged as SP500 moved through 1125, pressuring for a breakout but not there yet.
Up Volume: 863M (+136M)
Down Volume: 562M (+195M)
A/D and Hi/Lo: Advancers led 1.12 to 1. It was mostly large caps as the small caps were lagging during the large cap reshuffle.
Previous Session: Advancers led 2.94 to 1
New Highs: 184 (+37)
New Lows: 14 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Solid gain as the large caps moved through 1125 but could not punch through 1130, tapping that level on the high again. Volume surged to the best level since early August, but as it was expiration, we don't want to ready too much into that. More important is the continued resilience at this level after breaking through the 200 day SMA (1116) and the 2004 down trendline (1117). A whole range of resistance up to 1144, but it is setting up to take it on.
SP600 (small caps) were volatile last week, moving up and down day to day but working laterally over the 10 day EMA. Similar to the large caps, working laterally and trying to set up the next move.
DJ30
The blue chips ran past the 200 day SMA (10,290), but by the close could not hold the move. The 10,250 range was the level we earmarked as a tough level to clear. It is still working at it, and will find resistance all the way up to 10,400.
Stats: +39.97 points (+0.39%) to close at 10284.46
Volume: 295 million shares Friday versus 173 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Now that expiration is over the indexes can show us what they have. They have worked into position to make a run at this key resistance and the levels we anticipated to cause trouble and potentially stall the move for the next test.
There are many reasons to doubt the move has further legs, but it is also strengthening with better price/volume action, better leadership, and it has the Fed ready to start curtailing its rate hiking campaign. Recall that the base really got underway as the Fed started its rate hiking. If it is through, stocks will try to rise.
That does not mean we don't get some further test, either a sharper drop or a lateral and lower move that is more of a slow bleed. One scares out the sellers while the other wears them out.
There has been some distribution and some accumulation. There are more and more stocks that have continued to build their bases during the past three weeks of consolidation, rallying, and consolidation. That adds to the potential leadership as well as the overall market strength. We continue to look at the best patterns in leaders and potential leaders, and if we get a solid entry point we move in.
At the same time we are also watching for stocks that are struggling. There are still many of those in the market; not all stocks are improving and building bases. If those three distribution sessions on NASDAQ lead to a breakdown, they will pay off quickly to the downside.
The FOMC meets Tuesday. We doubt there is any serious belief no rate hike is coming, and thus the 25 basis point hike won't cause any problems. Oil is back to rising in the aftermath of Ivan and with the ongoing Yukos problems. Iraq is getting more violent ahead of elections as is Afghanistan. Plenty of the same old headwinds, but the market has risen in their face. This week we find out more of what it has left in this move.
End part 1 of 3
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