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world stock market, us stock market
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10/09/04 Technical Traders Report
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Technical Traders Report Subscribers:
Note: Part 3 containing new plays will be sent later today.
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: None issued
Trailing stops issued: STJ; TDS (options); AMMD
Stop alerts issued: JCOM; LH; DGII; OMC
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:
- Weaker employment data fuels further selling.
- No upside surprises in jobs though Q1 revised significantly higher.
- Part 2: jobs for the future.
- No easy ride as stocks give back most of the recent rally.
- Subscriber Questions
Early earnings, jobs disappointment send stocks back to drawing board.
Stocks received no boost from the Friday economic data, at least not an upside boost. After the Wednesday break higher, stocks reversed the next session just as they did in June and September. Friday they continued the move lower, giving back the breakout over the September highs and key down trendlines. The only difference was lower volume on this round of selling.
Non-farm payrolls failed to match rather modest expectations, initial earnings were less than spectacular, problems with oil continued (Nigerian ceasefire failing, fourth record price close), and a rash of bombings ahead of Afghan and US elections had investors on edge with the near term uncertainty.
The news furthered the Thursday selling, but the open was not that bad with NASDAQ and SP500 holding near support and making a rebound move. That was over in the first hour, however, as the buyers went dormant for the session. NASDAQ and SP500 both fell back through the key resistance they just cleared. At the close they were back in the middle of the mid-September range.
Volume was lower but the price losses were significant. No distribution, but there was not a lot of distribution at the start of the September sell off either, and it still ran stocks down significantly. At least the big money was not dumping their shares; if that was the case it would be harder for the indexes to hold, make a higher low, and then start the next leg just as they did in late September. In short, it could have been worse given the news, undermining the possibility of another rebound from where the market closed Friday. Indeed, it will have to hold near these levels this week and stage a rebound to keep the recent (excluding Thursday and Friday) more bullish bias intact.
THE ECONOMY
Last week we discussed parallels between the late 1990's to early 2000's and the 1970's to 1980's. Major continuing costs confronted the US while the economy underwent fundamental change brought on by foreign competition. When most said the US would never again emerge as a leading economic power after being left behind by Japan and other growing Asian economies, the power of the free enterprise system was unleashed by investment incentives enacted in the early 1980's as well as a shrinking of the federal government. The resulting 20 year boom was historical in proportion. The US is undergoing similar economic upheaval and change now. It is also benefiting from the start of a new investment wave spurred by the return of incentives. Growth rates not seen since the early 1980's returned in 2003. The initial groundwork has been laid to set the foundation for the next economic run. There are, however, major obstacles that could block or blunt the move. This week we take a look at those problems.
Mediocre jobs report provides no real surprises as the jobs makers of the 1980's and 1990's fight to maintain earnings growth.
The biggest surprise was not the 96K non-farm payrolls instead of the 150K expected, but the lack of an upside revision to August. There was a revision, but it was to the downside, with just 128K jobs created as opposed to the 144K originally reported. The service sector added 109K (though retail dropped 15K), construction 4K, but manufacturing fell 18K. In sum, not enough traditionally measured jobs to soak up the new entries in the job market for the month.
Again, that was no surprise. The weekly data did not support a big gain though those numbers were jumbled by the storms. The private surveys monitoring both hiring and layoffs did not show the strength that would support a surge in hiring. Further layoff announcements by some big names this month as well are not going to help much in the future either. Companies have money. They are selling more product with less permanent help, hence the strong productivity levels. At this juncture companies are not feeling the need for permanent hires; just in time hiring of temps and a few permanents for specific projects has replaced broad hiring of permanent workers. Some say there is about to be a surge of hiring while others say things have changed so much that there won't be the same hiring seen in past recoveries.
The truth lies in between. Jobs are definitely heading overseas just as they have always done as our economy grows. At times the process speeds up, particularly when the US economy undergoes substantive change as it is doing now. Let's face it. Someone originally from India immigrates to the US, gets a good education or already has one, gets a great job, and then is offered the chance to move home at a reduced though still grand salary for India. The person can live very, very well in his or her home country. Quite a lure. It is happening quite a lot and is good for that person as well as the company.
Outsourcing? In a way, though different than the traditional outsourcing we hear about. It allows that company to better compete with the rest of the world though here in the US it is one of the factors that makes this most recent transition in our economy hard to deal with, and it happens more frequently in times such as these when those companies that were the big job creators in the last big economic change mature and have to streamline to maintain earnings growth rates that will attract investors.
Look at the technology sector and you see it with layoffs at many big tech names as they look to cut costs and increase market share as their main methodology for growth. Dell is not making any technology innovations; it is simply broadening its range of products (printers, servers, supplies) as it pillages other tech sectors. Microsoft is not innovating anymore; its last big foray into 'new' territory was making a game box. These 'old' tech companies are a long way from the heady days when Steve Jobs asked John Scully if he wanted to sell sugar water or change the world. Now they are content to sell as much sugar water as they can in order to satisfy shareholders. Let's face it, selling sugar water does not require the same high paid employee as when the invention of new machinery and software was in its early stages where innovation, new ideas, and challenging the status quo got you the job. That is not the realm of the 'old' tech companies anymore.
Upward revisions to Q1 add what the September report did not.
The 96K was below expectations and kept the overall job creation below 2 million for the past 12 months. Q1 job creation was bumped up by 236K jobs, however, a nice revision and boost to the overall total. We can most likely expect revisions to Q2 and Q3 as well what with the storms. Sometime in the first half of 2005 we should know how many jobs were created in 2004. Indeed, the claim that the Bush presidency will have net job losses is hardly a fact at this point.
Job creation part 2: Where are the jobs to come from?
It won't be GE, MSFT, MMM, DELL or the other household names. As noted, they are not innovating much anymore; their fight is to milk their cash cows as much as possible as any mature company does. The reason: incremental gains from new technologies just don't have a big enough impact on the bottom line. Thus, they don't go there.
It will be up to new technologies that the small guys develop, those folks that lost their job in the streamlining or couldn't get a job out of college or just decided they could do it better. Alternative energy sources, new medicines for an aging population, services for an aging US population; those are just a few of areas of potential growth. Fuel cells were the rage in 2000, but that was ahead of their time just as the medical stocks were bought ahead of their time in the eighties in anticipation of a graying America. Now that America is actually aging, those companies coming up with the new ways to service those seniors will profit.
Will this be enough? Back in 1998 and 1999 when the Fed was raising rates and the Clinton tax hikes had created a major drain on the economy that was touted as a great thing (the huge surplus), we wrote at least once a month about the path we were on to give away our technological advantage to the rest of the world just as our population was starting to age. With population explosions in Asia and South America, we argued the Fed should not be trying to slow the economy, but should be trying to drive us further ahead to cement our lead. Thus when we started to age the rest of the world with its exploding populations would come to us for their solutions. With the Fed hiking rates into a peaking economy and the huge surplus idling hundreds of billions of dollars that should have been in the economy to help fight of the Fed's snipe hunt for nonexistent inflation and its draining of the money supply, the stock market vapor locked. The resulting tech crash and market crash foretold an economic crash that saw GDP growth fall from 7+% to negative in three short quarters. Business came to a standstill and the crash dried up investment capital and opened the door that effectively gave away our lead. Now we are trying to run with China and other parts of Asia at the same time we oil up the walkers and wheelchairs. We are sorry to say that the gains we had were squandered on yet another foolish gambit where the Fed and the government thought they could micromanage the economy. As usual they failed. As usual we are the ones to suffer.
Skeptics are correct in their concern for our economic future with an aging population and thus a declining demand curve to drive consumption similar to what Japan experienced. Japan had a more severe problem because instead of a baby boom as enjoyed in the US post WWII, Japan suffered a baby dearth because it lost so many young males and boys in the same war; that demographic hole killed consumption in the late 1980's and 1990's and sent Japan into its 12+ year depression without the economic consumption engine to pull it through that time.
The US has something of a demographic hole coming up with the aging of its main consumption group, the baby boomers. We have to recoup our technology lead while they are still consuming, i.e., alive. That is why it is imperative that we have real incentives to invest in the US. When the economic environment is right, new technologies and businesses spring up in areas most of the experts never dreamed of. Even if they are right, as seen in the tech boom, of the thousands and thousands of businesses that spring up, only a few make it public, and only a few of those become the leaders with the 'killer' products. The one thing the US has going for it: a system that rewards innovation and invention. Again, it is imperative to keep this system unfettered so there is broad investment, so that seemingly wild ideas are chased down and perfected into products that benefit us all.
Promoting an environment to allow seemingly wild ideas to grow into reality has always been the US' underlying economic strength. In short, we need to dance to the tune that has brought us through depression, recession, boom and bust. What we hear from the political campaign is not promising; both sides want to regulate us into a second class economic power, forgetting how we got where we are. One pushes national healthcare and drug re-importation, with Canada being the oft-cited answer to our problems. We have many Canadian friends. When they have serious health problems they come to the US because Canada may or may not be allowed the procedure or treatment they seek, if they are granted treatment, it may take months to get it, and the level of care frankly cannot match top US care. As for drugs, re-importation is basically re-importing price controls. Insulin was invented in Canada long before its national healthcare and price control system. Since Canada's 'picture of healthcare' has been in place, not one drug has been created because there is no incentive to do so. There are many other examples from both sides of the aisle where the belief is that more regulation is the answer.
That is the kind of environment we need to avoid if we are going to make the recovery we wrote about last weekend. The tax incentives have started the ball rolling, but with the demographic problems facing the US, the squandering of our technological lead, and the need to fund our war on terrorism, the last thing we should do is hem in the US entrepreneur with higher tax rates and more regulations that replace business decisions with government mandates. Forcing companies to retain jobs in the US that would naturally migrate offshore is the same as imposing tariffs and limiting trade; very few benefit and the rest of us pay through higher costs and ultimately slowing and even stagnant economic growth. Allowing market forces and independent business judgment to make decisions about what business is conducted has made us the wealthiest and strongest nation in earth's history, even rescuing us from a premature grave dug in the 1970's. We need to continue the return toward free enterprise and individual decision-making and away from bigger government and more regulation that has stagnated Europe even under its new union.
THE MARKET
That premature jump Wednesday came back to haunt the market to close out the week. Stocks gave back the breakout from last week as the answers to the uncertainty regarding oil, earnings, the economy and terror remained unanswered. With a mediocre jobs report and a debate to follow that night, investors found no reason to step in.
It was not a great end to the week as a breakout was given back. It was not the death of the move as it can still make a higher low here at the September consolidation range just as it made a higher low in late September after that selling started. Volume was lower on this pullback; that does not prevent selling, it is just the better scenario if there is selling as there is not wanton dumping that would indicate the big money moving to the exits. Again, it was not good action at all, no gentle pullback, but it has left the door open for a rebound similar to September given the lighter volume.
Market Sentiment
VIX: 15.05; +0.55. Volatility is trying to make another bounce higher off of these trench bottom levels. Still well below the March, May and August levels when the SP500 bottomed.
VXN: 20.69; +0.1
VXO: 14.95; +0.39
Put/Call Ratio (CBOE): 1.01; +0.15. Lots of put activity as the market continued its slide. There were several sessions at 1.0 or better on the close at the August low. There were more in early September and then one again as the selling started on September 22 followed by several readings in the nineties. What does that mean? It means the put/call ratio has been something of a short term bounce indicator. Another reading over 1.0 and a higher low near this level might just be a reality.
NASDAQ
Gapped lower, filling last week's gap with ease, but not stopping there. It continued lower, punching through the high in the September consolidation, finally finding support at the 18 day EMA and the middle of that September range.
Stats: -28.55 points (-1.47%) to close at 1919.97
Volume: 1.681B (-4.17%). Another lower volume selling session as NASDAQ did not suffer a distribution day as the selling started that ended the week. Difference without a distinction? No. It would have been much worse if volume jumped as that would indicate big money dumping stocks.
Up Volume: 269M (-430M)
Down Volume: 1.396B (+353M)
A/D and Hi/Lo: Decliners led 2.26 to 1. This was not pretty as techs across the board along with biotechs and medical stocks suffered.
Previous Session: Decliners led 2.3 to 1
New Highs: 62 (-53)
New Lows: 43 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Other than SOX, NASDAQ took the worst beating Friday in a very disorderly retreat from the Wednesday break higher. It was not ready for that move to take on the January/June 2004 down trendline with just a couple days rest. It has paid the price, but volume did not surge. It held the 18 day EMA (1914) and the mid-September consolidation range (1900 to 1921). As noted, it has left the door open for a rebound and even set up a rebound as earnings from some big names such as INTC, YHOO, NOK, JNPR and NVLS are on deck. We saw how low expectations in August and September helped stocks overcome warnings. This selling to support provides a similar opportunity.
NASDAQ 100 sold through the trendline and the 200 day SMA on lower volume landing at the 18 day EMA as did NASDAQ. It too is in good shape to rebound.
SOX cut through the 50 day EMA (395.10) but landed just over the 50 day SMA (385). Decent place to make a higher low and try again, but it will need help from INTC, NVLS and others reporting earnings. We know INTC has warned; at least there is room for upside surprise, huh?
S&P 500/NYSE
Could not hold the down trendline or the September highs, finding the 200 day SMA on the close on lower volume.
Stats: -8.51 points (-0.75%) to close at 1122.14
NYSE Volume: 1.293B (-10.54%). Big volume drop as the large caps continued to sell. Still above average, but the lowest volume in two weeks (the rally weeks). No dumping Friday, and as with NASDAQ, that leaves the door open for a rebound off of this key support level.
Up Volume: 362M (+14M)
Down Volume: 912M (-179M)
A/D and Hi/Lo: Decliners led 1.04 to 1. Very modest negative breadth to go along with the lighter volume. Not a nasty day internally for NYSE.
Previous Session: Decliners led 2.72 to 1
New Highs: 135 (-110)
New Lows: 24 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Hardly a pretty picture with two sharp price losses that took SP500 back through the March/June down trendline (1129.50). It landed above the 200 day SMA (1119.6) after tapping that level on the low; wow a rebound to the close. Lower volume helped after the higher volume selling Thursday indicated some share unloading. A good place to hold for a higher low.
The small caps were hanging in there with modest losses through lunch. Then it did not. It ended up just behind NASDAQ, posting a 1.3% loss on the close. Held the 18 day EMA (292) and the September high more or less. As with the other indexes, a good point to rebound.
DJ30
The blue chips cannot catch a break. Never fails that one or more of its components gets hit with some bad news and the index takes it on the chin. BA was hit Friday as DJ30 slid below the 50 day SMA (10,123) as it heads for 10,000 to 9980, the September low.
Stats: -70.2 points (-0.69%) to close at 10055.2
Volume: 228 million shares Friday versus 275 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Jobs are out of the way, so this week earnings take center stage along with the continuing problems of oil and a terror threat ahead of the election. Stocks have been climbing that wall of worry with those issues still outstanding. It has not been an easy climb; a couple of steps higher a step and a half back. At least this time the move back was on lower volume, keeping the foundation for a further move higher. Hard to look at it that way after the Thursday and Friday selling.
Indeed the indexes are at a point they need to make a stand to continue the rally off the August low. They have one thing going for them they did not in late September when they sold off: the rally from that pullback was on the strongest volume in many months. After a long dry spell of volume in the 9 month base this year, volume kicked into gear as stocks rallied to a post August (the low in the base) high. Think about that. When looking at a base in a stock, you want to see volume dry up on the lows and then charge higher when it starts off the bottom and builds the right side of the base. That is what the price/volume action in the index bases is doing. This lower volume pullback to end the week continues the solid price volume action even though the selling was a bit more intense regarding price than you would typically want. It was not enough, however, to trump the strong volume recovery that was impressive not only in the volume but in the manner in which it recovered from the late September drop.
Thus we remain optimistic about the rebound potential at this juncture, but again, it has to hold near the current levels, make that higher low, and resume the recovery. In short, it has to continue climbing that wall of worry with a resumption of rising volume. The pullback has put some solid stocks back at good entry points as they continue their upside moves. Obviously that is where we are going to be looking this week.
To start the week we may see some additional follow through to the downside as the Thursday and Friday selling bottoms out. From there we look for buyers to move in start the rebound process. A lot depends upon earnings results being palatable enough, but the market still has the look it wants to continue higher when you look at the entire base and how it has responded in the last tow months and how the leadership has broadened.
Support and Resistance
NASDAQ: Closed at 1919.97
Resistance:
October gap up point at 1952.
The 200 day SMA at 1964
January/late June down trendline at 1973
Price resistance at 2050
Support:
The 18 day EMA at 1914
The low of the September range at 1900
September gap up point at 1894
The 50 day EMA at 1894
The October 2002/March 2003 up trendline at 1881
S&P 500: Closed at 1122.14
Resistance:
1125 to 1130 stalled the last move and could be some support.
The March/June down trendline at 1129.50
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 1119
The 50 day EMA at 1114
The 50 day SMA at 1106
1096 to 1100 represent price support.
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1064 (August low).
Dow: Closed at 10,055.20
Resistance:
The 50 day SMA at 10,124
The 50 day EMA at 10157
The February/June 2004 down trendline at 10,260
The 200 day SMA at 10,296
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:
9980 to 10,000 held last week.
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.
October 14
Trade Balance, August (8:30): -$51.3B expected and -$50.1B prior
Export Prices ex-agriculture., September (8:30): 0.4% prior
Import Prices ex-oil, September (8:30): 0.4% prior
Initial Jobless Claims, 10/09 (8:30): 335K prior
October 15
Business Inventories, August (8:30): 0.6% expected and 0.9% prior
PPI, September (8:30): 0.1% expected and -0.1% prior
Core PPI, September (8:30): 0.2% expected and -0.1% prior
NY Empire State Index, October (8:30): 25.0 expected and 28.3
Retail Sales, September (8:30): 0.6% expected and -0.3% prior
Retail Sales ex-auto, September (8:30): 0.4% expected and 0.2% prior
Industrial Production, September (9:15): 0.4% expected and 0.1% prior
Capacity Utilization, September (9:15): 77.5% expected and 77.3% prior
Michigan Sentiment-Preliminary., October (9:45): 95.0 expected and 94.2 prior
Treasury Budget, September (2:00): $16.0B expected and $26.3B prior
SUBSCRIBER QUESTIONS
Q: Hello; great job. Do options deal with overhead supply in a similar way stocks do?
A: Thanks. There are two points to the answer. Options are derivatives, meaning they derive their value from the underlying security. Thus their value in the most general sense is tied to the movement of the underlying security. There are other factors that come into play such as volatility, time until expiration, the security price in relation to the option strike price, but a strong price move one direction or the other drives the option value.
Thus, overhead supply that impacts the movement of the underlying security, i.e. a prior price peak over the past few months, can stall the stock's move and thus impact the option's price. If you own a call option (rises when the stock rises), a stall in the stock price stalls the option price and even reduces its value as volatility drops. If it is closer to expiration, it loses time value as well.
A second consideration applies to the option itself and the number of open interests at particular strike prices. As expiration approaches, a stock tends to gravitate toward the level with the most open interests. If the market is slow, the stock typically will close just the other side of where the highest open interests reside. In other words, say there is a high open interest in $40 call options on a stock that is trading at $38 and not moving much. As expiration approaches the stock will tend to cheat toward $40, but it will also often fail to surpass that level. There is an old saying that in a slow market, at expiration a stock will close at the level of the most pain. In other words, the above stock would close below $40 and those open interests would expire worthless.
End part 1 of 3
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world stock market
us stock market
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