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money investment, investment help
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10/14/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: ENER
Buy alerts issued: None issued
Trailing stop alerts: ACDO; TV; AIRT
Stop alerts: 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:
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SUMMARY:
- Stocks start higher, finish lower once more.
- Oil inventories rise but not helping oil inflation.
- Market getting oversold near term, but some significant damage done in this selling.
- Earnings hot and cold, but overall not good enough to overcome other market obstacles.
Stocks forego ceremonial rally attempt, cut to the chase early.
Stocks had been putting on the semblance of a stiff upper lip, rallying at the start of trading, but then giving up gains and closing near the session low in overall bearish action. Thursday they mostly dispensed with the upside formalities and got on with the selling. There was a brief rebound attempt after the lower open, but that was summarily put to bed when oil inventories were up but heating oil was way down. The market used that as a reason to hit the sell button.
That was not the only news to negatively impact stocks. Overall earnings have been viewed negatively with results generating specific advances to those reporting great results. Outside of those stocks, however, most stocks are selling as shown by the A/D line. In addition, a lawsuit announced against major insurance companies took more wind out of the sales. Financial stocks were sold as well, adding pressure to an already struggling SP500.
The large cap index cut through the 50 day SMA without much of a fight and is pushing toward the late September low. NASDAQ held up better, managing to hold price support at 1900 and the 50 day EMA. Of all the indexes, NASDAQ looks the best, and it is no flower bouquet. The large caps are under serious strain and look as if they will be unable to make a higher low if buyers do decide to come back in. We will put it this way; if it does make a higher low, it will do so by less than one point. Obviously that is not very strong action. A higher low is important as it shows a steady supply of buyers that move in when stocks pullback from highs. If a prior low is undercut, that shows those that bought at that level before are not as interested or are being way outnumbered by the sellers.
Volume backed off on the selling, potentially a positive indication after SP500 suffered a couple of quick distribution sessions. It was not that consoling given the price losses, however. What was more interesting was the less than 100 million shares separating NASDAQ and NYSE trade. NASDAQ is considered the speculative index, and thus there is simply more volume as speculators buy into these stocks that tend to run up and down more rapidly. On the other hand, the more staid and steady NYSE has less of this speculative trading ongoing (indeed, less volatility is the stated reason from many NASDAQ companies that make the switch to NYSE) and thus less volume (it also counts trades differently). When NYSE volume closes in on NASDAQ trade, that indicates the market is getting a bit oversold or sold out. Simply put, when the speculators are slowing their speculation, that is an indication the sellers are winding down.
THE ECONOMY
Oil inventories rise, but refineries are behind.
Oil stocks rose 4.2 million barrels, much better than the 2 to 3 million bbl build originally expected (which was reduced to 1 billion by late Wednesday). Gasoline inventories rose ahead of expectations as well, but given winter is already starting to blow up north, it was heating oil that received the attention. Those levels dropped 2.5 million bbl, much more than the 1 to 2 million anticipated. That did not help the price of oil overall, and it certainly did not help heating oil prices.
A major problem remains the uncertainty regarding supplies in general, e.g. potential Middle Eastern disruptions due to terrorism, Nigerian civil war, Venezuelan strikes, and Gulf of Mexico production shut-in thanks to Ivan. That keeps a 'terror' or 'fear' premium tacked onto oil.
That aside, refineries are not running at capacity. They had been doing a good job of building distillate inventories in August ahead of the season, but that has not held. Refineries on the gulf coast are not all back up and running at full speed. Instead of a national operational average of 98%, it is down to 90%, and that is hurting the ability to build up heating oil. That is keeping prices high even though supplies overall are up. Of course, oil still rose on the session even with US inventories rising. Those other elements impacting price continue to do just that.
Oil and inflation.
Back when the Fed was hell bent on slowing the US economy in the late 1990's, there was a surge in oil prices when OPEC decided that prices were too low. The cartel took voted and reduced production quotas with the express intent of getting prices higher. The Clinton administration talked tough talk, OPEC did the same, Clinton opened the SPR, OPEC cut production further, etc. Eventually oil prices waned because oil prices were being artificially inflated.
The Fed latched onto the oil price rise, however, using it as another reason for raising interest rates in order to defeat inflation. Problem is, prices were not rising because of inflation in oil prices; this wasn't the case where more money was chasing a limited quantity of goods caused by a real scarcity. It was an artificial cartel. To treat it as true inflation is folly. Would raising rates cause OPEC to reduce prices? No. Maybe years down the road as the rate hikes drive the economy into the ground and oil demand tanks. Then OPEC would have to reduce prices. Near term it would do nothing to impact oil prices.
This time there is a real problem with supply and demand. China continues to slurp more oil, and it is just getting started. It used to export 2 million bbl/day and now it imports over 2 million bbl/day. Its usage increased 47% in July. Moreover, it is still in the early stages. It is ramping up its infrastructure to handle the cars, trucks and other consumer uses of oil that its massive population will demand. This time it truly is a matter of more dollars chasing a limited supply, and we are seeing that there is real inflationary pressure building in other products unlike back in the late 1990's when the Fed made that one up. Hey, it was a lay-up for a Fed bent on hiking rates, an easy reason to use that was there for the taking.
Now, however, the Fed is saying there is no inflation problem even with oil near $54/bbl and every business we know of talking about raising prices to help offset that additional cost. That is inflation. We all saw it in healthcare, education and insurance last year. It is now creeping into other areas. Only a bumper crop from our super efficient farmers will keep food prices from rocketing. Example: Florida's citrus crop was hammered by the hurricanes, but orange and orange juice prices are not jumping. Why? Because Florida oranges are juice oranges and producers stocked up on the frozen concentrate before this storm season. Luck? No, just smart US businesses and farmers at work. That helps you and me avoid some inflation problems, and other similarly efficient industries do the same in other areas. That mitigates the impact of rising oil and other prices, but it does not eliminate them.
The Fed seems to be sticking its head in the sand and saying it is not a problem. At the same time, the Fed is going to keep on raising interest rates even as the economy slows its expansion and is at risk of a further slowing from rising energy prices. It wants rates higher so it can lower them again if need be. Again, given the current economic conditions (i.e., a solid but slowing expansion), by raising rates further it could create the very environment requiring lower rates. Makes your head want to snap off. So, the Fed is not worried about inflation, but it wants to keep raising rates to prevent inflation. That is a variation of an old 1999 theme. There are, however, real inflation problems in the mix, so some would say the rate hiking is appropriate. But that is not why the Fed is raising rates. There goes my head again.
The big issue has to do with energy and whether it causes the type of inflation the Fed thinks it does or if it is more of a threat to cause a recession. Conventional wisdom: rising energy prices cause rising prices in other areas as those oil costs are passed along, and that leads to higher prices overall. Not good, but consider the other side: rising energy prices are a natural governor or inhibitor of economic activity. They are a tax on the consumer and they use capital investment dollars as those dollars are burned up in vehicle tanks as opposed to creating something. The higher they go, the less investment in the economy and the less consumer consumption. That slows the economy and ultimately demand for energy itself. If you add rate hikes on top of that, you are certainly not promoting economic growth; you are doubling the tax on it. To us it never made sense to burn down a village to save it.
THE MARKET
There were some positives, e.g. lower overall volume on the selling, NYSE volume close to eclipsing NASDAQ, the put/call ratio closing over 1.0 again, and VIX moving through the 200 day SMA. Those indicate the market is getting oversold near term. They do not remove the fact that stocks sold hard again after some distribution earlier in the week. It also does not change the fact that the down trendline has unequivocally held and that SP500 has joined DJ30 in a break through key near support and that the best looking index is NASDAQ. Nor does it change the fact that even the intraday action has turned bearish.
Out of the worst looking times the rallies tend to begin. We note that this recent sell off has not come close to taking down all stocks. There are many stocks still in excellent shape, either rallying into the teeth of the selling or simply making a nice pullback to test their move higher. The tenacity of many leaders as well as the rise in the sentiment indicators is a positive for a market that has sold sharply, but it is a near term positive. DJ30 has given up its attempts at making this the breakout move, and SP500 is on the verge of doing the same if it makes a lower low here.
The August rebound looked as if it had the potential to be the last low in the base ahead of a breakout. It has just about squandered this try. NASDAQ still has a shot at holding here, making a higher low and leading higher. It will have to drag the rest of the market anchors with it. On top of that, with the Fed still raising rates, it is going to continue to struggle.
Market Sentiment
Bulls versus bears: Bullishness among investment advisors continued its rise this week, moving to 54.1%, just off the 55% level that is considered a bearish indication. Bullishness rose right into this selling. Bears declined to 23.5%, just over the 20% level considered bearish.
While some sentiment gauges are getting closer to an extreme, others are still way off the mark just as we saw at the August bottom. The extremes in some of the indicators such as the put/call ratio have been good enough in this long base to start the modest rallies higher. It has yet to show extremes across the board, the kind of marker you look for at the bottom though it is still hard to see because of all the emotion that accompanies market bottoms.
VIX: 16.43; +1.01. Broke through the 200 day SMA, but still well short of the August high at 20, and 20 is considered the low end of the 'normal' range from 20 to 30. Using volatility as a judge, the market is either way off being ready to rebound seriously or it is really close, i.e., volatility has simply gone dormant for so long.
VXN: 22.3; +0.17
VXO: 17.13; +0.88
Put/Call Ratio (CBOE): 1.07; 0. Third consecutive reading at or above 1.0 on the close. During this base several such closes have been a pretty good indicator of a short term bounce ahead. Indeed, the overall put/call ratio hit 1.01. The last time it did that was in August. A week after that the market started the August rally.
NASDAQ
Sold further, holding some support at 1900 and the 50 day EMA. It is still easily in the running for a higher low, but it will be the leader after SP500 and friends have abdicated.
Stats: -17.51 points (-0.91%) to close at 1903.02
Volume: 1.608B (-10.59%). Significant volume fall off after the Wednesday distribution. Its volume faded as NYSE volume gained on it.
Up Volume: 483M (-418M)
Down Volume: 1.088B (+267M)
A/D and Hi/Lo: Decliners led 2.23 to 1. SOX hammered NASDAQ, effectively precluding any rally. It did quite well, however, given the semiconductor weakness.
Previous Session: Decliners led 1.57 to 1
New Highs: 46 (-58)
New Lows: 59 (+7)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Continued lower following the Wednesday distribution. NASDAQ undercut the 18 day EMA (1915); it really had little room to maneuver having closed right at that level. Techs got no help from chips. NASDAQ tumbled to near support at 1900 and just above the 50 day EMA (1898). It is still in position to make a higher low at important support; indeed, it is just about the only index ready to do that other than SP600.
NASDAQ 100 performed similarly, hading toward the 50 day EMA and still in easy shape to make a higher low.
SOX was in trouble all session, unable to clear the 50 day EMA (394.02) and then undercutting the 50 day SMA. Still above the late September low (370).
S&P 500/NYSE
Sold through the 50 day SMA on lower though still strong trade. Managed to hold the September low, but by a gnat's behind.
Stats: -10.36 points (-0.93%) to close at 1103.29
NYSE Volume: 1.491B (-3.53%). Some lower trade but still well above average as SP500 continued lower and sliced through more support. Has been under distribution more than the other indexes.
Up Volume: 438M (+47M)
Down Volume: 1.041B (-99M)
A/D and Hi/Lo: Decliners led 1.44 to 1. Very modest downside breadth all things considered.
Previous Session: Decliners led 2.06 to 1
New Highs: 56 (-49)
New Lows: 64 (+21)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Another thud lower, this time taking out the 50 day SMA (1107) after the 50 day EMA (1114) Wednesday. Volume still strong as SP500 heads toward the next support at 1100 and the late September low (1101). A lower low does further damage to an index in full retreat after a decent breakout over the last downtrend of 2004.
SP600 dove lower as well, managing to hold near the 50 day EMA (286.95). This is where it needs to make a stand at this key level and also above the last low in September at 284.
DJ30
The blue chips finished off 10,000 with ease as the insurers were the next Dow components to get whacked. 9900 and 9800 were mere road signs as DJ30 fell Thursday. It managed to put on the brakes near 9900, the May low that gave rise to the summer rally that was over before most called it a rally. Volume was strong once more though it declined a hair. Still under distribution.
Stats: -107.88 points (-1.08%) to close at 9894.45
Volume: 268 million shares Thursday versus 276 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
More earnings after the close failed to generate much excitement, at least to the upside. JNPR was sold after hours on its report after it ran higher in anticipation. Good results, just not good enough to overcome the rest of the problems facing the market.
In addition, some key economic data is out with inventories, PPI, New York PMI, retail sales, industrial production heading a big list. Earning and important economic data. And let's not forget the triple witch expiration for October. Lots of news and the market has set up for the worst ahead of it.
Indeed, a further move lower on the open sets up a rebound potential. Stocks have sold for six sessions and are getting oversold. Further selling down to 1100 to 1090 on SP500 and a full test of the 50 day EMA on NASDAQ would set up a rebound attempt after this pitch lower.
We continue to watch the leaders that have held their ground curing this selling. Those are the stocks that have shown the strength and will be ready to lead back up when the rebound begins. With NASDAQ holding up over the September low and leaders still holding near support, we are still looking for a rebound on this move. With SP500 fading, it is a harder haul, but the market is getting oversold enough for at least a modest rebound even if the move stalls and the market rolls over again.
Support and Resistance
NASDAQ: Closed at 1903.02
Resistance:
September high at 1921.
October gap up point at 1952.
The 200 day SMA at 1963
January/late June down trendline at 1968
Price resistance at 2050
Support:
The low of the September range at 1900
The 50 day EMA at 1898
September gap up point at 1894
The October 2002/March 2003 up trendline at 1889
S&P 500: Closed at 11o3.29
Resistance:
The 50 day SMA at 1107.
The 50 day EMA at 1114.
The 200 day SMA at 1120
1125 to 1130 is prior price resistance, and 1128 is the September closing high.
The March/June down trendline at 1127
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:
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 9894.45
Resistance:
9980 to 10,000.
The 50 day SMA at 10,113
The 50 day EMA at 10,135
The February/June 2004 down trendline at 10,245
The 200 day SMA at 10,298
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:
9900 is some support from the May and July lows is trying to hold.
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): -$54.0B actual versus -$51.4B expected and $50.5B prior (revised from -$50.1B)
Export Prices ex-agriculture., September (8:30): 0.2% actual and 0.4% prior
Import Prices ex-oil, September (8:30): 0.1% actual and 0.4% prior
Initial Jobless Claims, 10/09 (8:30): 352K actual versus 340K expected and 337K prior (revised from 335K)
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): 0.7% expected and -0.3% prior
Retail Sales ex-auto, September (8:30): 0.3% expected and 0.2% prior
Industrial Production, September (9:15): 0.3% expected and 0.1% prior
Capacity Utilization, September (9:15): 77.5% expected and 77.3% prior
Michigan Sentiment-Preliminary., October (9:45): 94.0 expected and 94.2 prior
Treasury Budget, September (2:00): $22.0B expected and $26.3B prior
End part 1 of 3
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