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money investment, investment help
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9/21/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: WBSN
Buy alerts issued: SMH; PMTC
Trailing stop alerts: DECK
Stop alerts: PXLW; PXD
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. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- Stocks drift into FOMC decision, post gains afterward.
- Fed continues raising rates, gives no indication it is changing its view.
- NASDAQ breaks over down trendline, SP500 trying to break higher on some stronger trade.
- Very active warning season.
Stocks find something to like in Fed statement.
As has been typical the past few FOMC meetings, stocks drifted higher toward the actual decision and added to that gain following the statement. Just so happens it was fortuitous timing in that it helped NASDAQ break above the January/April down trendline and rallied the small cap index through near resistance on the way to the midsummer high. While stocks waffled some in the last half hour, they held their gains and did so on some decent though mixed volume.
It was not a clear case that stocks were going to hold the gains. After the announcement it was the typical case of post-Fed volatility as the fund managers jockeyed for position as they pondered any potential hidden meaning. After 30 minutes stocks broke sharply upside, with NASDAQ and SP500 clearing their near resistance. Even then it was no clear sailing; after the 10 minute burst higher stocks gave back half of that gain in the last hour.
In the end the salient points were mostly positive: NASDAQ cleared its down trendline, breadth was strong as small caps renewed their surge and led the market, SP500 showed stronger volume on its gain, and SOX, while hardly surging, posted another gain above the 50 day EMA. A net positive day, but not clear and convincing as NASDAQ volume failed to rally as well.
THE ECONOMY
FOMC raises Fed Funds rate to 1.75%.
As expected the Fed raised rates 25 basis points, and it did not significantly alter its statement. Even after the rate hike the Fed believes the current rate is accommodative. The Fed stated that output growth 'appears to have regained some traction' after moderating earlier in the year 'partly in response to the substantial rise in energy prices.' Further, 'despite the rise in energy prices, inflation and inflation expectations have eased in recent months.' That was about as close as the Fed would get to saying further rate hikes might be tempered. It concluded that the upside and downside risks to sustainable growth and price stability as roughly equal, allowing the Fed to remove the policy accommodation 'at a pace that is likely to be measured.' No hint of a slowdown there; just more measured removal of what it stated to be continued accommodative policy.
Those looking for a bone from the Fed regarding future rate hikes received slim pickings. The lessening inflation language was all they had, and that was a holdover from the prior statement. The Fed seems to believe that the economy is still growing solidly enough to take back more monetary stimulus even though it says inflationary pressures are low and dissipating.
The bond market is not all that pleased with the pace of economic growth and the Fed's rate hiking that, despite the Fed's assurances that it is still stimulatory, the bond market apparently views as restrictive. The yield curve has steadily flattened as the Fed hikes short term rates. In other words, as the Fed hikes short term rates, longer term rates are not rising nearly as rapidly. That makes the yield 'curve', the line drawn from short term rates (typically lower) to longer term rates (typically higher), flatter. In a rapidly growing economy the curve is steep as long term rates are significantly higher, indicating future demand for currency and the cost of utilizing scarce dollars longer term. When the economy slows, the curve naturally flattens as the bond market prices in less demand for money down the road.
It is natural for the yield curve to flatten as the Fed raises short term rates. The market then attempts to adjust and factor in the impact of higher short term rates on growth and thus what long term rates will be. If the economy continues to grow, longer term rates adjust higher. If the economy is projected to slow, long term rates fade. If the economy is projected to sink, long term rates fade lower than short term rates. That is an 'inverted' yield curve, and it forecasts an economic slowdown or recession.
Various bond managers and former Fed officials were discussing where the Fed is going with rates. Some say 2%, many say 3%. 2% gets the real rate close to 0%, still what is considered an accommodative level. While the bond curve is still adjusting to the rate hikes and the economic forecast, the curve is definitely flattening, something we noted a month back. At 25 basis points a move (and there is no way the Fed should do more given the economy), it would take another 5 rate hikes to reach 3%. That would take the Fed well into 2005.
Given the current economic activity, i.e. a slowing expansion, a 3% Fed Funds rate would most likely invert the yield curve. Some think it would dry up excess liquidity and give the market confidence the Fed was doing what was necessary, but that is likely fantasy land. We still view 2005 as slowing after a pickup in Q4 2004 as the last business investment incentives expire. The expansion is slowing, and there is nothing in the pipeline to ratchet it back up at this juncture. Some think it is stronger than many believe. Others think it is weaker than many believe. As usual, the truth is in between; it is expanding but at a slowing rate. At some point it will stop expanding without some serious redirection of our tax dollars that go into Washington.
THE MARKET
NASDAQ finally cleared the January/April 2004 down trendline and held the move into the close. The small caps resumed their move as well, clearing near resistance and moving toward its all-time high. Breadth was solid with the small caps out in front, and the chips contributed again as well. Volume was the only question mark, again, as NASDAQ volume faded while NYSE volume grew. With SP500 rallying on volume toward 1130 resistance and the small caps surging again toward a new high, that NYSE volume gives the move more strength.
In short, the market is doing its best to continue the rally through September despite its low volume roots, low volatility, and poor sentiment. More positive price/volume action, rising leadership, and breaks through resistance are building a stronger upside move. There are still a few cracks in the move as outlined above and with NASDAQ still needing some better upside volume, and just when the majority feel it is safe to move back into the water, it is time to keep your eyes open.
Market Sentiment
VIX: 13.66; -0.77. Gapped sharply higher to 16 then gave it all back and more as stocks ralied late in the session.
VXN: 20.3; -0.26
VXO: 12.86; -0.92
Put/Call Ratio (CBOE): 0.76; -0.16. Sliding lower, but still well above the 0.3 level where it would be more indicative of some selling ahead.
NASDAQ
Gapped over the early 2004 down trendline, tested the move, and then rallied in the afternoon. First close over that level; sure which volume would have accompanied the move.
Stats: +13.11 points (+0.69%) to close at 1921.18
Volume: 1.536B (-2.48%). Disappointing below average volume on the move above the down trendline. FOMC meeting started trade off light, so we will see if it can pick back up on a further upside move.
Up Volume: 1.06B (+297M)
Down Volume: 442M (-278M)
A/D and Hi/Lo: Advancers led 1.91 to 1. Solid breadth as small cap NASDAQ stocks joined the large caps.
Previous Session: Decliners led 1.42 to 1
New Highs: 81 (-4)
New Lows: 28 (-11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Closed off the high (1925.85), but managed to hold onto the break above the January/April down trendline (1912). It is making the right price moves, but with the break higher out of the week long lateral consolidation, a nice volume spike would have been the better action and set the pace for a run toward the 200 day SMA (1966). NASDAQ continues to show bullish action with the rally, consolidation, and then resumed rally today. It will need more volume, however, to confirm this move.
NASDAQ 100/QQQ rallied to tap the 200 day SMA on the high but then backed off. This is a key point for the large caps to clear along with overall NASDAQ topping the down trendline. NASDAQ cannot continue its move without NASDAQ 100 making the move over the 200 day (35.81 QQQ, 1440 NASD 100).
SOX continued its work above the 50 day EMA (396.68) right behind the small caps in leading the market Tuesday. Not a strong move, but after the solid surge Monday, a rest here just over the 50 day is not bad action.
S&P 500/NYSE
Rallied up to the top of the recent range at 1130, but could not quite put the breakout away. Solid, above average volume was a nice plus on an FOMC day.
Stats: +7.1 points (+0.63%) to close at 1129.3
NYSE Volume: 1.313B (+10.2%). Volume rallied in the afternoon as SP500 and SP600 rallied well. Again, particularly good for an FOMC announcement day.
Up Volume: 960M (+495M)
Down Volume: 341M (-378M)
A/D and Hi/Lo: Advancers led 2.39 to 1. With the small caps leading the way (+1.3%) breadth was very impressive.
Previous Session: Decliners led 1.47 to 1
New Highs: 196 (+52)
New Lows: 16 (-7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps moved up to the top of the recent 1125 to 1130 range, hitting 1131 on the high before backing off on the close. Volume advanced, the second solid volume session in the past three, a very positive development in an already improving price/volume environment. Now SP500 needs to put away 1130 on continued strong trade. Of course that only sets it up to test the next resistance near 1145, but that is the life in recovering from selling.
The small caps surged out of their weeklong lateral move, rallying on strong NYSE volume. the small cap index made good on its second resting point in this move that has taken it from 263 to 293 in just over a month. Next resistance is at 293 and 296.35. A move over the June high puts it at an all-time high.
DJ30
Bounced off of the 50 day EMA (10,182) after tanking to that level Monday on the bad news in the blue chips for the day (CL). Volume moved higher as the index did as well, something it needed but still has to move back through the 200 day SMA (10,293).
Stats: +40.04 points (+0.39%) to close at 10244.93
Volume: 223 million Tuesday versus 222 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Stocks did a pretty decent job in their initial reaction to the FOMC rate hike. After everyone has a chance to go home and sleep on it we will see what they really think. SOX is above its 50 day EMA and NASDAQ is over the down trendline. Both significant moves, but both will have to hold the move. SOX looks as if it could use a day to test toward the 50 day and take a breather. NASDAQ will need its help and then generate some volume on the resumption of the break above the down trendline. With the small caps surging higher as well, the market has suddenly looked much better.
Again we don't want to ignore the lighter NASDAQ volume on the move. When things look good, the cracks can be glossed over, and those can open up and swallow you. The small caps look good but they are also approaching yet another resistance point. These are just things to keep in mind, but we see a lot more of what we call 'building patterns', those where stocks have come off of their lows and are setting up the moves higher to form the right sides of their bases. When they clear important resistance and then test it, the move up from there can be very good money making opportunity.
This move higher has taken place during the most active warnings season in two years. Does anyone need more proof that the economy is slowing its expansion? Companies cannot match the bar set during the surge in economic activity. Even consumer stocks are suffering slowing. Yet, stocks continue to set up and move higher in the rally. In short, investors are still looking at enough growth ahead to keep stocks moving higher. Again, however, we need to see more upside volume confirmation of this, particularly on NASDAQ.
Support and Resistance
NASDAQ: Closed at 1921.18
Resistance:
The 200 day SMA at 1966
Support:
The 2004 down trendline at 1912
1894 is the gap up point.
The 18 day EMA at 1883
The 50 day EMA at 1879
The 50 day SMA 1857
The October 2002/March 2003 up trendline at 1858
July 2003 highs at 1755
S&P 500: Closed at 1129.30
Resistance:
1130 is proving to be some resistance and held again Tuesday.
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:
1125 was key price support.
The March/April down trendline at 1117
The 200 day SMA at 1116
The 18 day EMA at 1117
The 50 day EMA at 1109
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 10,244.93
Resistance:
The 200 day SMA at 10,293
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 10,182
The 50 day SMA at 10,121
9783 to 9793, the August lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 21
Housing Starts, August (8:30): 2000K actual versus 1930K expected and 1988K prior (revised from 1978K)
Building Permits, August (8:30): 1952K actual versus 1985K expected and 2066K prior (revised from 2055K)
FOMC Meeting (2:15): 25 basis point hike to 1.75%.
September 23
Initial Jobless Claims, 9/18 (8:30): 338K expected and 333K prior
Leading Economic Indicators, August (10:00): -0.2% expected and -0.3% prior
September 24
Durable Goods Orders, August (8:30): -0.3% expected and 1.6% prior
Existing Home Sales, August (10:00): 6.65M expected and 6.72M prior
End part 1 of 3
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