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world stock market, us stock market
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9/29/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: WYNN
Buy alerts issued: None issued
Trailing stops issued: None issued
Stop alerts issued: None issued
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:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Stocks rally for second session on stronger volume.
- Q2 GDP rising on back of inventories.
- Fed raising rates and clamping down on money supply despite its claim of low inflation.
- End of quarter portfolio shuffling sends indexes to next resistance sporting solid volume.
Stocks continue volume rebound into the close.
Stocks started a bit soft but wasted no time moving higher once more. NASDAQ, SOX and the small caps were again in the lead; when the market rallies, seems these are the leaders. Large caps lagged all session, but when the techs and chips stalled in the afternoon, it was the large caps that gave life to a last hour charge to the close.
Volume was up again as NASDAQ and SP500 cleared the 50 day EMA with some authority after holding the 50 day SMA on the Tuesday early morning low. Once more stocks held their gains and rallied into the close, a shift of the bearish intraday action back to the more bullish run to the close. That sets them up for a test of the 2004 down trendlines for these indexes.
It was not clear if it was all long term buying. Leaders were moving higher again, something they should do on a market rebound, but this action is occurring just as the quarter ends. Yes the market was a bit oversold and needed to come up for air, and no, we do not want to ignore stronger volume on a move back up. Funds, however, typically buy into leaders in the last few days of a quarter, pushing volume higher on those stocks and the market as a whole as they sell some stocks and buy into the leaders; that really pumps volume higher.
Breadth was so-so even though small caps were a leadership group. The narrow breadth on the move shows the action was focused on particular areas just as it is with a short covering rally. With the quarter end that focus was leadership stocks.
Given the positives and negatives of this rebound, the key will be what happens Thursday and Friday as the quarter ends and NASDAQ and SP500 hit the down trendlines. SOX remains weak, still struggling at the 18 day EMA, well below the 50 day EMA. It is hard to argue with the volume and the positive looks of the leadership stocks that made good moves on solid trade Wednesday. At the same time the move had an artificial look to it that we see many times at the end of a quarter. Again, the real market will reveal itself when the down trendlines are tested and the quarter ends. We suspect it is going to encounter some selling once more.
THE ECONOMY
Q2 GDP revised higher.
2.8% became 3.3% (3% expected) growth as inventories rose at the strongest rate in four years. As we have noted many times before, it is hard to classify this as good or bad. If it had occurred in 2003 it would have been a great indication as companies would have been seen as building inventories in the face of strong demand. Now that the economy has hit a 'slow patch' with 3% to 4% growth, the inventory rise is seen as producers having a harder time clearing goods off their shelves. No one really knows, but the trend suggests the latter: inventories remained low all during the rapid growth quarters of 2003 when goods were being snatched off shelves. Now that there is a slower growth period, inventories are rising. That is pretty clear to us that it is inventory excess at this juncture as opposed to ramping up in anticipation of further demand. Companies remain gun shy to create that overhead whether it be inventories or personnel.
We do not want to give the wrong picture. It was not all inventories as imports were revised lower while exports were revised higher. Imports detract from GDP as they are not part of US production. All in all, Q2 activity was solid but hardly racing ahead. Not bad growth after the strong 2003 spurts and the 4.5% pace in Q1.
Oil revisited as oil inventories rise.
Hate to keep beating this animal, but there were some key developments Wednesday that directly impacted stocks. First, US oil inventories unexpectedly rose by 3.4M bbl when they were expected to fall by 3 to 4M bbl. Big news in the oil market, and oil backed off $50/bbl though it hardly imploded. Gasoline and distillate inventories were lower but in line with expectations. When a storm churns through the gulf, refining of these products is going to suffer. It will take a couple of weeks to get supplies moving back up. All in all, it was a rather encouraging report.
Second, the Nigerian situation calmed down from the 'all out war' promised by the rebels as a ceasefire was brokered. Whether it holds or not remains to be seen, but it did have a calming effect on the oil market along with US oil stocks.
Money supply is falling as Fed hikes rates. The typical historical scenario is repeating itself.
Despite the Fed's apparent calm about inflation and its optimism for the economic future, the bond market continues to flatten as short rates rise and long rates fall. That flattening is can be an early warning of a slowing economy, not an expanding one as the Fed is trying to tell us is occurring right now. Who is right?
History shows the Fed rarely is, at least in what it tells us. That may be quite different from its unstated goals. In 1999 and 2000 it was telling us about how inflation was going to ravage the economy if it did not act even though there were no signs of inflation. The Fed had other reasons for raising rates and simultaneously shrinking the money supply. Instead of really reacting to what the economic data showed, it had a prearranged idea of what rates should be at, what growth rates should be, and how strong the US economy should be vis- -vis other world economies. That 'smarter than the market' attitude ruined the retirements of millions of hard working citizens. Money was drained from the economy as rates were hiked. The inevitable happened: the economy seized up and the market collapsed ahead of it.
The Fed is doing the same thing right now. There is no real sign of overall inflation, at least not surging inflation; we all see healthcare, energy, insurance and education rising, but does anyone really believe that the Fed hiking rates will stall out those costs? They have nothing to do with the state of the economy but with the government regulation of these markets and the inefficiencies that guarantees. The Fed acknowledges the lack of inflation, but it is bent on getting rates to a 3% level for many reasons including having ammunition in the event of another slowdown/recession, disaster, etc. Thus the Fed and its statements indicate the Fed is going to keep on hiking as it sees, with something of tunnel vision, 'traction' in the economy.
At the same time, however, it is not just hiking rates to get more ammunition. It is also once again draining off the money supply. Money supply has at best stagnated; in reality it is declining. Rising rates, declining money supply, and an already slowing economic expansion. That is not going to help the economy no matter how much 'traction' the Fed says it has. Again, the Fed told us repeatedly the economy was too hot in 1999 and 2000, just before the stock market crashed and the economy followed it down.
Bond curve showing slowing or is something else at play?
As we have noted recently, the bond market is showing a flattening yield curve. That can indicate economic slowing as longer term rates fall faster than short rates because expectations of less economic growth lessens expected longer term demand for money. Typically that happens when the economy is expected to slow.
Tuesday, however, what has been hinted at for some time was made more or less official regarding Fannie Mae. It changed some of its handling of how its top officers would be paid if they were involved in criminal activity relating to the firms financials. It was also revealed that it is having to raise its reserves by 30%. That means it is involved in unwinding its positions to raise its reserves. That is having an impact on the bond market yield curve as well.
It is too early to tell whether this is a major part of the flattening process; that will take another 2 to 3 months to figure out. In addition, there has simply been some reallocation into bonds from stocks during the recent selling bout. That is also pushing long rates lower as bonds are bought. Again, it will take time to determine if this and the Fannie Mae actions are impacting this flattening and thus artificially flattening the yield curve.
There is no doubt, however, that the Fed is drying up the money supply despite its statements that it does not really fear inflation. If it did not or if it wanted the economy to continue to expand even as it raised rates, it would let money supply continue to expand to offset the rate hikes. It could regain its ammunition for any future rate cutting that became necessary while it let the 'traction' continue to take hold. As it is, the Fed is embarking upon the same course it always takes: hiking rates, drying up money flow, and simultaneously telling us something different. Typical and still a recipe for Fed-induced disaster.
THE MARKET
Stocks rallied again on stronger volume and the breadth fanned out once more in the afternoon as stocks closed at session highs. Bullish intraday and overall action as NASDAQ and SP500 retook their 50 day EMA. An upside shift in bias on the heels of the sharp selling the prior week.
Taken at face value it would be rung up as another accumulation session as stocks reverse off of the recent selling. We are not going to ignore the price and volume action, nor the solid looks the leaders are showing. There are several showing price/volume action, and if they continue and make a breakout move we will put money into them. At the same time we also know it is quarter end, there is some associated portfolio shuffling ongoing, breadth is relatively narrow on NYSE, and the indexes still face their down trendlines.
That is reason to show caution but definitely not overwhelming evidence the rebound will fail. We still believe there is some more downside on this move, but if the market tells us otherwise we won't let pride stand in our way of doing what the market tells us.
Market Sentiment
VIX: 13.21; -0.62. Volatility slides back below 14 and toward the recent lows at 13. You don't want to use VIX as your trading signal, but it helps you get ready. 13 is where the last selling round started and it makes the test of the down trendline ahead very interesting.
VXN: 20.67; -0.53
VXO: 12.81; -0.24
Put/Call Ratio (CBOE): 0.85; -0.06
NASDAQ
Rallied through the 50 day EMA on a strong volume shot, the best since the early September break over that level as the rally off the August low hit its second leg higher. Now it is ready to test the down trendline.
Stats: +24.07 points (+1.29%) to close at 1893.94
Volume: 1.656B (+6.56%). Volume was the best since early September when NASDAQ started the second leg higher on the rally. The good volume break through the 50 day EMA gives it some staying power as it heads toward the first 2004 down trendline.
Up Volume: 1.264B (+452M)
Down Volume: 369M (-351M)
A/D and Hi/Lo: Advancers led 2.01 to 1. Excellent breadth really improved in the last half hour as NASDAQ turned higher after its afternoon lateral move.
Previous Session: Advancers led 1.62 to 1
New Highs: 83 (+20)
New Lows: 48 (-24)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After the bounce off of the 50 day SMA on the Tuesday low and the break through the 50 day EMA Tuesday, NASDAQ is now ready to take on the early September gap up point (1894) and the January/April 2004 down trendline (1902). Techs were out in front all session along with the small caps, setting the pace for the advance. A higher low at logical support, strong volume on the move, and some decent leadership and breadth to boot. It has the earmarks of a strong move and has set the stage for another try at the down trendline that stands between it and the 200 day SMA (1965). The trendline is the next very important test as it will have filled the gap lower and challenged that last peak where it reversed on strong volume just as it tried to make the breakout.
NASDAQ 100/QQQ broke through the 50 day EMA as well, closing near the session high on continued rising volume. as with NASDAQ, a higher low off of the 50 day SMA sets the stage for a quick rebound to test the 200 day SMA.
SOX posted a solid move on a percentage basis, but its failure to rally Tuesday left it behind the rest of the tech sector. It rallied to the 18 day EMA on the session high, and unlike the rest of the indexes, it backed off in the last hour and failed to take out near resistance. It still ahs the 50 day EMA (393.72) standing in its way.
S&P 500/NYSE
Hung in all session then came to life late, holding its move over the 50 day EMA and rallying to the first 2004 down trendline.
Stats: +4.74 points (+0.43%) to close at 1114.8
NYSE Volume: 1.404B (+0.52%). Volume rose on NYSE for the second day, scoring another solid above average volume gain. This is the base back to back volume session since July.
Up Volume: 835M (-123M)
Down Volume: 550M (+132M)
A/D and Hi/Lo: Advancers led 1.22 to 1. Breadth narrowed considerably Wednesday despite a small cap rally. This indicates most money pushing a few stocks higher as opposed to a wide ranging dive into stocks; that suggests that quarter end position shuffling discussed above.
Previous Session: Advancers led 2.16 to 1
New Highs: 151 (-40)
New Lows: 28 (-23)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Continued the volume rebound off of the 50 day SMA just as did NASDAQ, moving through the 50 day EMA (1109) along the way. SP500 was tentative all session but then found some footing late and closed at session highs right at the March/April 2004 down trendline (1115). Similar to NASDAQ, a higher low off next support and a rebound to test the recent hard selling. The trendline and the 200 day SMA (1118) are the key levels we would anticipate this move to run out of gas, but it is showing some very solid volume on these moves. That is giving it staying power if it is not just quarter end shuffling. The narrow breadth leads us to believe that is the case, but we won't ignore facts if it can continue the run higher through month end.
SP600 was again a market leader as the small caps rebounded sharply for the second consecutive session after a pretty nasty rollover. We not that relative strength is breaking out even while the index is below its April, July and even its recent September peak. That is a bullish indication after a nasty tumble.
DJ30
The blue chips staged another rally with the likes of CAT, DOW surged yet again, helping DJ30 continue the move off of 10,000. It is rapidly approaching the 50 day EMA (10,158) and resistance at 10,200. It too has made a higher low and is moving on solid volume (though lower Wednesday). Its pattern still lags but it too found support where it should have.
Stats: +58.84 points (+0.58%) to close at 10136.24
Volume: 218 million shares Wednesday versus 232 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Spending and income will get a close look before the open, followed by the Chicago PMI at 10ET. Spending is important, but not the breathless import some attach to it; with confidence holding at decent levels, consumption will continue. The regional manufacturing reports, however, have been very erratic the past three months; consequently, no big gains are anticipated. It is one of those 'show me' situations as far as the economists and investors are concerned. It is a valid concern as well, given the economy still needs a strong business sector to advance the expansion.
We are interested in jobless claims as something of a leading indicator for the September unemployment report. While employment is hardly a leading indicator, given the election is rapidly approaching, it gives real spice to the campaign. Thus a sneak preview with the weekly claims would be nice. Unfortunately the storms continued and that is going to once more make a realistic reading impossible.
Stocks found reason to rally with the oil news and other events of the day (e.g. capturing the number 2 terrorist in Iraq), but we still suspect it was mostly quarter end shuffling and that a continued fade could resume at the down trendlines. Given the volume on the move that is somewhat of a risky assessment, but we will know when the indexes hit the trendlines. Many stocks have moved up toward their resistance levels along with the indexes, and they too will show their hands as well; after all, the indexes are made up of individual stocks.
Speaking of individual stocks, there are still leaders that are in good shape, bolstered by this recent recovery. Energy suffered some on the oil news, but it is still hanging in there. Metals took a pause as well. Internets started higher again and many techs, though still deep in their bases, are trying to put together those 'building patterns' once more where they are at the point of starting up to form the right side of their bases. As seen in this last go round, those are somewhat risky as there is still a lot of overhead supply ready to push them lower, but if you move in over solid support, they can present a good risk/reward position.
The market continues to throw different pitches here as it sells on rising volume then rebounds on rising volume. We still think it needs further selling to set a real bottom to this base, and believe it will continue the move down despite the last two sessions of rising volume gains. We won't let that belief get in the way of fact, however. If the market blows higher on volume and breaks its downtrends, our beliefs are not going to stop it.
Support and Resistance
NASDAQ: Closed at 1893.94
Resistance:
September gap up point at 1894
The 2004 down trendline at 1902
Recent September high at 1921
The 200 day SMA at 1965
Support:
The 50 day EMA at 1879
The October 2002/March 2003 up trendline at 1868 (gap down point)
The 50 day SMA 1854
July 2003 highs at 1755
S&P 500: Closed at 1114.80
Resistance:
The March/April down trendline at 1115
The 200 day SMA at 1118
1125 to 1130 stalled the last move.
1130 is the March/June down trendline.
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 50 day EMA at 1109
The 50 day SMA at 1101
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 10,136.24
Resistance:
The 50 day EMA at 10,158
The February/June 2004 down trendline at 10,283
The 200 day SMA at 10,297
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 SMA at 10,108
9980 to 10,000 held as support Tuesday.
9900 is some support from the May and July lows.
9783 to 9793, the August lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 29
GDP-Final, Q2 (8:30): 3.3% actual, 3.0% expected and 2.8% prior
Chain Deflator-Final, Q2 (8:30): 3.2% expected and 3.2% prior
September 30
Personal Income, August (8:30): 0.4% expected and 0.1% prior
Personal Spending, August (8:30): 0.1% expected and 0.8% prior
Initial Jobless Claims, 9/25 (8:30): 340K expected and 350K prior
Help-Wanted Index, August (10:00): 38 expected and 37 prior
Chicago PMI, September (10:00): 58.0 expected and 57.3 prior
October 01
Auto Sales, September: 5.2M expected and 5.2M prior
Truck Sales, September: 8.2M expected and 8.2M prior
Michigan Sentiment-Revised, September (9:45): 96.0 expected and 95.8 prior
Construction Spending, August (10:00): 0.4% expected and 0.4% prior
ISM Index, September (10:00): 58.3 expected and 59.0 prior
End part 1 of 3
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