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world stock market, us stock market
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10/02/04 Investment House Alerts Report
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IH Alert Subscribers:
Part 3 containing new plays will be forwarded later today.
MARKET ALERTS:
Target hit alerts issued Friday: VIP
Buy alerts issued: AMT; BDX; SIMG; JCOM; VRSN; WITS; AIRN
Trailing stops issued: AMR
Stop alerts issued: XLNX; OEX; AFL; SOX; BBOX
SUMMARY:
- Market erupts like St. Helens of old as investors rotate to stocks to start quarter.
- Then versus now: another 1980's-like inflection point?
- National manufacturing slips but shows signs of improvement, just like the overall economy.
- Japanese business confidence hits highs as Michigan consumer sentiment ebbs slightly.
- August construction spending rises to seventh straight record.
- Volume remains strong as techs stocks power through resistance, small caps surge to all-time high.
Strong surge starts Q4.
The Mount St. Helens eruption may have been something of a dud, but the stock surge Friday had the look of the real thing. With money rather inexplicably rotating to bonds the prior two weeks in the face of Fed rate hiking and some continued weakening economic data, stocks were under pressure, reversing an attempted breakout and crashing through support. The rebound was narrow and had the look of short covering and portfolio adjusting ahead of quarter end. That was indeed ongoing. After reversing off of the 50 day SMA Tuesday and rebounding to the first down trendlines, however, stocks did not start the quarter with another fade, but instead with a strong follow through to the next rally.
In doing so NASDAQ wiped out the reversal and SP500 made a strong move to do the same. SP600 broke to a new all time high. The gains were impressive. SOX 4.6%; NASDAQ 2.4%; SP600 (small caps) 2%; NASDAQ 100 2.8%; SP500 1.5%. Breadth was strong and volume expanded yet again on NASDAQ. It was no shrinking violet on NYSE either, but after the MRK blow off Thursday, there was little chance NYSE volume would top that trade. In addition, those leaders that had been leading the way the prior few sessions were at it again. Not all the same crop that started breakouts Wednesday and Thursday, but some new ones as well while the early leaders caught some air.
In short, the move had all of the attributes of a stellar follow through to the Tuesday reversal where the market made a higher low. Despite the shaky sentiment foundation and the abrupt, June-like reversal just as stocks tried to strength the August to September rally, buyers rushed in to start the final quarter of 2004 despite what on the face is a very lackluster future.
Many say the market started rallying in August because Bush was pulling ahead. Bush, however, 'lost' the debate Thursday. Economic data appears to be slipping and showing a slower and slower expansion. The Fed indicated it is far from through with its rate hiking campaign. Even with all of this, stocks did not appear to care. The market looks well down the road as it discounts the future, and it often improves when things look very questionable. We certainly have a hard time seeing a robust 2005 economy given some major investment incentives are expiring, the housing market basically holding steady from here, and the consumer servicing some major debt.
Comparisons to the 1970's and 1980's: the more things seem to be different, the less they are.
Nonetheless stocks are attempting a very bullish move. They still have some major mountains to climb, but they also are putting some peaks behind them. Perhaps, just perhaps, while the debate rages regarding outsourcing, the quantity and quality of jobs, and the imagined evils of a deficit, the economy is at a major inflection point as in the early 1980's. With the help of very similar investment incentives to those passed by Bush, that economy emerged from a decade of crises (e.g., the energy crisis), the massive costs of new regulations (new environmental regs that saved our waterways, air, etc.), and a lost war in Viet Nam along with a humiliating, impotent foreign policy (e.g., the Iran hostage situation). Growth exploded and the start of the technological boom was underway as the economy shifted further from rust belt industries to cutting edge, world leading technologies. Read the headlines from that day; we were forever going to be following Japan (our auto and steel manufacturing was decades behind and would never catch up); America had lost the ability to lead economically and militarily; the American worker and American products could not compete. Indeed, it was commonly accepted in the seventies that the US economy had peaked and was in an irrevocable decline.
But in the early 1980's there was all of that capital that the Reagan tax cuts freed up from being locked inside tax shelters for decades. It was invested all over the US, looking for opportunities. A couple of guys from Berkeley created a wooden box that would do the same thing for individuals a room sized computer would do for businesses. They invented something called a disk drive as well so they could more efficiently access and store data. Some Harvard dropouts wrote the software system that those personal computers would use (though they arguable stole the system from the first two guys) and outfoxed some corporate giants in the process in one of the greatest wealth creation moves of modern times. This story was being repeated all across the country to different degrees as a major change in the business of the US took place. It uprooted the old ways, was blamed for throwing people out of work. As we later realized, those changes were just part of a continuous and permanent change to the economy, and those jobs were lost as a result of everything that transpired to that point, and that those horrible changes at the time ultimately led to the creation of hundreds of millions of jobs. Not just jobs, but the best jobs the world had ever seen.
Is it a coincidence that in 2003 we saw growth rates not seen since the early 1980's just after those tax and investment incentives took effect? Those were massive growth spikes that get things rolling; growth rates have to cool off, and even the fabled Clinton golden years did not see that kind of expansion. Those years were the extension of the foundation set in the early 1980's. Is it a coincidence that small businesses are being created at an extremely rapid pace as shown by the LLC and limited partnership filings as well as the household employment surveys? There were no jobs in the early 1980's (I know, I was fresh out of school trying to find one), so people took those investment incentives and made their own jobs just as they are doing now. Is it a coincidence that new wireless technology is opening vast opportunity across the nation for new business ideas and new ways to work? Will it be any surprise when see an explosion of new services that we never thought of before?
Even with all that faces us, we feel the seeds of the next economic surge have been planted and are preparing to sprout. The parallels are there. The cost of regulation (retooling, new processes, new procedures) in the 1970's and 1980's versus the cost of terrorism today. Big deficits then, big deficits now. Many today still fail to see the connection between the seeds planted in the early 1980's and the boom of the next 20 years. Indeed, some think it was a tax hike by Clinton that made the difference (some refer to that as the 'right' tax rate as they apply misguided economics). What that tax hike did was to siphon more money from the economy that it was supposed to as it created huge government surpluses that should have been feeding back into the economy instead of feeding increased government programs and associated spending. The loss of that economic seed money and the Fed's missteps are what finally killed off the long expansion.
Right now the seeds of the new economy, yes a truly new economy as created in the early eighties that developed the technologies that blossomed fully in the late 1990's, are starting to sprout. A strong growth surge is experiencing a natural slowing before eventually picking up again. If we change the field now and take away what created the environment for the start of this recovery, then we most likely lose the recovery before it can blossom and create those millions and millions of new jobs that our system of individual ingenuity, risk taking, and commensurate rewards repeatedly produces. Yes, given the right environment, our economy will produce the new technologies that create the plethora of new jobs and further raise our standard of living. We have to be smart enough to recognize that it is the individual, not the government, that makes it happen. Empowering the millions of ingenious US citizens to take risks and put their ideas to work is how we have done it for over 200 years. That gives us all of the comforts listed above, but it also gives us the mightiest economy on earth and thus the ability to wage war on terror, give billions and billions in aid every year to the rest of the world, and pay for the entitlements we have created here at home. Raising taxes and choking off the investment and risk taking spirit that drives our prosperity is no way to create new jobs for our citizens or create the wealth needed to fight the war on terror.
THE ECONOMY
From the big picture to the specifics of the week. The economic data continue to show the slowing expansion persists, but it is nonetheless an expansion.
National ISM expands, but at a slower rate.
The mixed signals from the regional reports gave rise to something of a mixed national report. Overall the number was down for September, coming in at 58.5 in September, better than the 58.3 expected but less than August's 59.0. Though lower overall, there were some bright spots. New orders slipped to 58.1 from 61.2, though activity was reported in line with August. Otherwise, things improved. Production rose to 61.6 from 59.5. Employment moved to 58.1 from 55.7. Prices paid, while still high, fell to 76.0 from 81.5.
In sum, the manufacturing index continues its expansion, but not at the rapid pace of 2003. As discussed above, after the strong moves last year, the slower expansion pace is normal for now. We do expect it to improve this quarter with the investment incentives due to expire. After that, it will have to show more, but we are not yet certain where the incentive will come from. Perhaps the market is anticipating a continuation of the investment incentives.
Michigan sentiment fades, Japan rises.
Michigan sentiment matched the Conference Board's reading more or less, showing a slight drop in the face of higher gasoline prices and the job market. As we often note, however, the consumer sentiment surveys rarely match consumer actions. In other words, consumers tend to consume until the sentiment levels hit very low levels. Thus while lower this month, they indicate little change in the spending from consumers.
Much more important is business sentiment with respect to spending levels. Japan just notched its highest level of business sentiment tin 13 years. Now if you recall, the Japanese depression was about 15 years in length. Thus to have the highest reading in 13 years may not appear to be much. As with the start of the US recovery, however, notching those new highs and strong growth rates are the obvious signs of recovery.
August construction soars.
Expectations were for a 0.4% gain, but private construction exploded, rising 0.8% to $1.02T, just over the $1.01T in July. Private construction rose 1.4%. Residential building jumped 1.7%. Private non-residential construction, a good gauge of business confidence in the future (building requires a belief in the future) hit the highest level since June 2002, rising 0.8%.
Very strong numbers indeed. They are not only a testament to confidence, but to low interest rates. It is a lot easier to incur and service debt when rates remain at historical lows. Low rates bolster budding confidence even more.
THE MARKET
We pretty much covered the action above. The triumvirate of SOX, NASDAQ and SP600 (small caps) led in a big way, and when they are strong the market is strong. Stocks posted their most significant move of the entire rally from the August low, and may have well turned the corner on the 9 month base. Stocks started showing accumulation since late August, then suffered some distribution in mid to late September. Volume has surged on the recovery the past week. A very positive turn.
This rally still has its roots in very shaky sentiment readings, the kind that starts the rally with a less than full tank. They remain far from extremes, at least the kind to fuel sustained moves. There are a lot of bulls as reported Thursday, and this rally is only going to bring more to the fore. When there are too many bulls the market runs out of ammunition to drive it higher as everyone is already invested.
Sentiment is still a secondary indicator taking a back seat to price and volume action. Right now that action has turned positive with a very strong breakout along with many leadership stocks as noted in the Thursday report. As long as price/volume action holds positive with leaders making strong moves, you have to go with what the price/volume action is showing. Friday the move was strong on price, strong on volume, strong on leadership, and strong on breadth.
Leadership is very interesting. While tech overall has been lagging, there are tech stocks that are right in the mix of the leadership. Indeed, leadership, while including energy because of rising oil prices, is expanding. In the last big rally in the late 1990's it was all technology. This rally sports leadership from technology, energy, industrials, financials, transportation, retail. In short, it is much broader than the golden age back in the 1990's. Friday even MSFT moved after a dormant two months. The tide was definitely rising: price, volume, breadth.
The big issue now is sustainability. With those sentiment indicators already showing a lot of bullishness we will keep an eye out just in case any distribution crops up once more.
Market Sentiment
VIX: 12.75; -0.59. The lowest reading of the year, indeed in the last 9 years. We do note that it is trying to break up the relationship that it set up during this year with the market ups and downs.
VXN: 18.91; -1.57
VXO: 12.55; -0.89
Put/Call Ratio (CBOE): 0.97; +0.11. Powerful rally and put activity jumps. More covering perhaps as funds covered their put positions they had acquired to protect on a downside move in September.
NASDAQ
Gapped above the January/April down trendline and closed at the session high on the strongest volume since some selling trade in July. Impressive.
Stats: +45.36 points (+2.39%) to close at 1942.2
Volume: 1.839B (+8.81%). Fourth consecutive upside volume session as the large cap techs continued to recover after lagging seriously. Short covering morphing into that longer term buying, the handoff of the baton.
Up Volume: 1.545B (+551M)
Down Volume: 284M (-377M)
A/D and Hi/Lo: Advancers led 2.42 to 1. Excellent breadth as the entire NASDAQ, large cap to small, posted gains.
Previous Session: Advancers led 1.3 to 1
New Highs: 143 (+42)
New Lows: 32 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped above the January/March 2004 down trendline (1900), rallied, and held the gain on the close. Bullish intraday action. Volume exploded as well, adding muscle as NASDAQ cleared the September high (1921). It leaped over major resistance in one move and looks to have turned the corner on forming the right side of its 9 month base. The 200 day SMA (1964) is the next major resistance facing techs as they advance. After this move a run othat point would be worthy of a rest.
NASDAQ 100 gapped higher as well and rallied through the 200 day SMA. Volume was surging on the QQQ. Lots of buying.
SOX rallied through the 50 day EMA (393.70), making a higher low and moving toward the September high (406.66). The chip equipment stocks came to life, providing some backbone. Still, there is a lot of work to do with most of these stocks.
S&P 500/NYSE
SP500 actually gapped higher and showed the same bullish intraday action, closing at the high and breaking through the down trendline on excellent volume.
Stats: +16.92 points (+1.52%) to close at 1131.5
NYSE Volume: 1.59B (-9.14%). Volume faded, but Thursday trade was artificially inflated by the MRK turnover. Disregarding that session, volume was the best late June when the index distributed heavily as it gave up the summer rally.
Up Volume: 1.361B (+304M)
Down Volume: 215M (-452M)
A/D and Hi/Lo: Advancers led 2.94 to 1. Excellent breadth as the large and small caps worked together.
Previous Session: Advancers led 1.5 to 1
New Highs: 345 (+140). Getting some impressive new high figures as SP600 hits an all-time high and the large caps head back toward the February high.
New Lows: 16 (-8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Impressive move, gapping higher but just below the 200 day SMA (1118). That did not stall the move, however, and the large caps powered higher all session, closing on the high and edging past the March/June down trendline (1130.5). This is the last down trendline for the year and sets up a run toward the high in the base. The June and April highs are still in the way, but this move, even more so than on NASDAQ, has turned the corner on the base.
SP600 was simply unreal. After selling sharply last week and early this week, a strong reversal and breakout to a new all-time high. All of the predictions of the death of the small caps have been premature. Typically small cap issues are early cycle movers. They are refusing to give in, and now the large caps are coming back. Almost too good to be happening.
DJ30
The blue chips are lagging the other indexes, but it too made its own significant move, clearing the 50 day EMA (10,156) on some solid though lower volume. Given the MRK pummeling Thursday, volume was more than adequate. Lots of overhead still to deal with, including the February/June 2004 down trendline (10,275) and the 200 day SMA (10,298). It is a follower now as opposed to a leader.
Stats: +112.38 points (+1.11%) to close at 10192.65
Volume: 267 million shares Friday versus 377 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Another debate at the end of the week fresh on the heels of the September jobs report. That should make for interesting debate fodder, particularly since expectations are not high (140K), and we have not seen any indications of an appreciable change in the more contemporaneous indicators. Employment agencies continue to state the market is vastly improved, but it ahs yet to show up in the non-farms number. As per the lengthy discussion in the market summary, that is not out of line with a major inflection point in the economy. As is always the case, however, correct perspective is always lost near term as the events are too close for most to see where they fit into the big picture.
After such a move, what is the encore? NASDAQ still has room to move up to its 200 day SMA, and a move in that direction sets up some form of breather. Then we see if there is sustainability. Volume, breadth and leadership certainly indicate there should be, but we are not going to forget the sentiment indicators and their relative levels. In short, how many big money investors (i.e. funds, insurance companies, pensions) are still ready to put money into stocks. When bulls hit 55% we will be watching price/volume action closely.
The breakouts have been coming in waves, something a strong market will produce. That keeps fresh crops of new breakouts coming as different sectors step up. Another session or two higher, however, and there will be an overbought condition and stocks will be in need of a breather. That would most likely put NASDAQ near the 200 day SMA, a natural point to consolidate some gains.
End part 1 of 3
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world stock market
us stock market
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