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us stock market, trade stock
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10/19/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: RIMM
Buy alerts issued: ASKJ
Trailing stops issued: None issued
Stop alerts issued: AVN
SUMMARY:
- TXN, IBM foster early rally that once again reverses on volume.
- CPI understates inflation for September, housing starts fade.
- Earnings continue to 'underwhelm' investors as expansion strength fails to justify a steady, uninterrupted rally.
- Set to test the lows yet again.
Early enthusiasm stampeded by sellers.
With futures pointing toward a fairly robust open that would push SP500 past the 50 day EMA, we cautioned pre-market that the test of that break, not the break itself, would be the key for the session. The index opened strong, clearing the 50 day EMA and flirting with a test of the 200 day SMA. It did not take out that more potent resistance and slid back to test the early move. It held, at least for 10 minutes. Then it slipped below the 50 day for good. Two modest rebound attempts made consecutive lower intraday highs, and when the last one failed the sellers piled on.
Sellers drove SP500 and NASDAQ to close at session lows on spiking volume. An early rally that reverses at resistance on rising volume and closes on session lows is just about the worst case scenario. Worse would have been making a lower low below 1101 on SP500 in the same session. As it stands, the large cap index is just over that point; can still hold at this level but the momentum after the reversal resumed the downward bias that started in early October. Even with the reversal, NASDAQ remains in decent shape as it and the small caps try to hold the line well above the last low. SOX even looks half way decent as it works in a trading range at the bottom of its 10 month base.
Thus it was not all gloom on the reversal, but the market remains hobbled, running into trouble every time it is just about poised to make a decent move. That has more to do with the persistent high oil prices and coming to grips with just how hard an impact they will have on the slowing expansion. Stock prices are driven by earnings and earnings in general depend upon economic health. Stock prices thus discount future economic growth. With spiking oil prices and high commodities, the large cap indexes such as SP500 and DJ30 and their industrial components are under a lot of pressure because those higher prices cut into earnings. If they cannot pass them on to consumers, then it is a direct cost that eats into earnings. If they are able to pass them along, that can give rise to inflation (same number of goods, rising prices), another condition that has a negative earnings impact down the road. We have already seen numerous companies blaming higher materials costs (e.g. steel) as hurting current earnings.
In short, the market fights back from selling as money works its way into the market, but has yet to make a clear breakaway move. Indeed, the past three important attempts at moving through important resistance or off of a key support level have failed. In the case of NASDAQ and SP600, it has not resulted in a breakdown and they are still in position to continue the move. SP500 is again struggling, however, and NASDAQ will have to pull it along with it. That anchor chain gets heavier and heavier each trip lower, however, and SP500 and DJ30 are back once more at recent lows and selling on stronger volume than they are rising on, showing more sellers in the market than buyers.
THE ECONOMY
September consumer prices supposedly tame, but don't feel that way.
Once more you look at the government numbers and then your wallet and you try to figure out the 'fuzzy math.' Yes the report showed prices rising 0.2% as expected and the core (less food and energy) rising 0.3%, a bit more than the 0.2% anticipated. Wait a minute. Take out energy and prices rose? That means energy prices were lower than we thought. Indeed, the report shows gasoline and other energy sources were flat. Problem is, the report did not pick up the spike higher in the last half of the month. It also showed housing prices fading. While some housing markets have peaked, that is not the same as prices falling. That does not even consider the other areas we have discussed in the past: insurance, healthcare, education, important parts of the economy that are not even included in the CPI.
You rationalize by saying well at least they are being consistent, but when you look at the energy costs from September and they were supposedly flat, well, that makes you wonder about the entire report. What we do know, however, is that energy prices continue to rise, and this time it is primarily because of demand. Sure there is a fear or terror premium tacked on, but even without that, prices have risen because of demand as opposed to some arbitrary cartel decision. More demand and a more or less constant supply means more dollars chasing the same number of goods.
That is the definition of inflation regardless of what the CPI says, and that is what the market is dealing with as it tries to rally but then runs into distribution as it tries to make the key moves. There are the other issues such as the election, the war on terror, Iraq, but the fundamental issue for stocks is future earnings. Higher oil prices are bad for several reasons as noted: they increase costs that reduce earnings if they cannot be passed along; they can cause inflation if the prices are passed along; they reduce disposable income for consumers to spend on products. Prices have yet to crack, have yet to lose the fear/terror premium, and that keeps oil higher than even demand would indicate.
THE MARKET
Early enthusiasm on some decent volume gave way to sellers on even stronger volume. Monday volume rose as stocks recovered late, a good indication, but overall volume was lower. That shows there were more buyers in the market, but not as many as the prior selling. The higher volume reversal Tuesday shows the early buyers were overrun by the sellers using the rebound on some decent earnings news to sell into.
Decent earnings. In short, not an outright disappointment, but not enough to bring in those on the sidelines still uncertain of the market, and definitely not enough to turn sellers into buyers. As discussed above, stocks discount future anticipated earnings. With rising prices just what those earnings will be is up in the air. Current earnings are not bad by any stretch, at least not in general. There is a dearth of strong guidance about the future. Sure some stocks are talking about the future in glowing terms, and their business niche may indeed be that good. Overall, however, the future earnings are the ones that matter today, and even the companies are not fired up about them. While that is not the final word on earnings, it does not help when companies are ambivalent about the future.
Stocks are for the most part mimicking that ambivalence as they are unable to string together a continued rally without being punctuated by higher volume selling. That shows some systematic unloading of stocks on each rally. Overall NASDAQ has enjoyed more accumulation than distribution, but it is having to offset SP500 and DJ30 weakness, not to mention some weakness in SOX (or at least the inability to mount any move thus far). Thus once more stocks head into a session with SP500 attempting to hang on and avoid making a lower low and opening the door for another test of the bottom of the base. One thing the market has been able to do to this point, however, is hold the move higher despite being pushed back hard more than once. Again, it will have to show the same upside ability.
Market Sentiment
VIX: 15.13; +0.42
VXN: 20.84; +0.12
VXO: 15.63; +0.94
Put/Call Ratio (CBOE): 0.95; +0.18. The 3 consecutive closes above 1.0 failed to yield much of a rebound, but we note that this can have a delayed effect, sometimes a week or so. Overall, however, sentiment indicators have not approached extreme levels.
NASDAQ
Gapped higher and rallied to the early October gap up point but ran out of gas. It reversed and sold back on rising volume though not as heavy as NASDAQ.
Stats: -13.62 points (-0.7%) to close at 1922.9
Volume: 1.723B (+13.26%). After volume rose on the Monday recovery, it rose more rapidly and was stronger on the Tuesday reversal. Not the strongest trade of the month, but the second in the past five sessions after going basically distribution free the past several weeks.
Up Volume: 736M (-476M)
Down Volume: 970M (+704M)
A/D and Hi/Lo: Decliners led 1.57 to 1. Remained under control in rather modest, comparatively, NASDAQ selling.
Previous Session: Advancers led 1.46 to 1
New Highs: 92 (+10)
New Lows: 68 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher and has now fully filled the gap up to start the month. If you look at the pattern you see a gap higher early in the month, a lateral move that failed to take out the 200 day SMA, and then a gap lower. NASDAQ has rallied back to fill the gap lower but reversing yet again. Near term not a bullish indication, but NASDAQ does remain in the middle of its recent range and over the September consolidation (1921) and easily above the 50 day EMA (1901). It will have to perform as leader again, however.
NASDAQ 100 showed similar action, gapping higher but reversing to the close on rising volume. Held over the 200 day SMA and the down trendline, the silver lining in the session.
SOX continues its lateral move over 375 in a 6 week lateral move after bouncing off the September low. It is actually setting up a nice base, but it needs the time to complete it.
S&P 500/NYSE
Rallied over the 50 day EMA but failed below the 200 day and tanked back toward the late September low. Back again where it has to hold.
Stats: -10.79 points (-0.97%) to close at 1103.23
NYSE Volume: 1.733B (+25.83%). Strongest volume in four months as the index reversed below resistance, a classic bearish move. 3 distribution sessions in the past 9, SP500 showing more distribution than NASDAQ, and the pattern showing more wear and tear as well.
Up Volume: 486M (-248M)
Down Volume: 1.211B (+608M)
A/D and Hi/Lo: Decliners led 1.83 to 1. With health insurance companies possibly falling into Spitzer's crosshairs, the NYSE had a tougher time than NASDAQ.
Previous Session: Advancers led 1.2 to 1
New Highs: 127 (+10)
New Lows: 68 (+20)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Cleared the 50 day EMA (1114) early, rallied toward the 200 day SMA (1120), and then reversed. It fell below the 50 day EMA, made two weak attempts to try that level again, and then folded the tent. It broke the 50 day SMA (1110) as well, closing in on the late September low at 1101. Again, the significance of that level is the ability to make or hold a higher low. If the index undercuts that level it shows those that were buyers at that point are now not strong enough or numerous enough to hold the gains. That gives sellers the upper hand and sends the index back down to work once more on the bottom of its base after one of the more promising moves off the bottom of the pattern. Never did have the extreme sentiment readings to bolster it as we noted back in August and September.
SP600 (small caps) is still holding the 50 day EMA (287.14) even after reversing from a nice break higher early Tuesday. This remains mostly a 'must hold' level, though it has a few more points to give to the late September low.
DJ30
Rallied to the 10 day EMA on the high (10,020.55) but could not hold the move, reversing as well on rising, above average volume. Even IBM could not pull DJ30's castanets from the fire. DJ30 is still struggling to hold some support near 9900, where it has been holding recently and also the May lows. Still in the downtrend and looks ready to break through the May low and head toward the bottom of the channel.
Stats: -58.7 points (-0.59%) to close at 9897.62
Volume: 264 million shares Tuesday versus 227 million shares Monday. Some positive volume from IBM, but not nearly the levels on the recent disappointing earnings.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Once more the large cap indexes find themselves at a level they need to hold, something they were able to do last week. The more you hang around in a bad neighborhood, however, the more likely you are to slip into some trouble. That leaves NASDAQ and the small caps as the best chances for yet another rebound attempt.
There is a school of thought that the market will rally right before or just after the rally, moving higher through year end. Call it tradition, history, whatever. There is a major competing force as discussed above, namely oil prices. Without that overhand the ability to rally would be much more likely. With the oil overhang we see the halting rally attempts displayed thus far. Now there is distribution once more on a rally attempt gone bad. it is hard to keep coming back, but thus far stocks have done just that. Wednesday they have another opportunity with a slew of earnings out before and after the market. There were notably few released Tuesday after the close.
It certainly looks as if SP500 is now going to undercut the recent September low and make a lower low. If that happens the door is open to fall back toward 1080 easily. What we were looking for last week was an undercut that then reversed on some short covering, sending the indexes higher. SP500 did not undercut but rallied anyway before running out of steam. Maybe an undercut generates enough fear, but there is also another heavy distribution session in the mix where big money was dumping shares. NASDAQ remains in position to hold, but it too suffered some distribution.
It remains a market of individual stocks, though there were few making the kinds of moves Tuesday that tempted us to put a lot of money to work. We continue to look for stocks that are thus far ignoring the market overall and continuing to set up for upside. At the same time the distribution requires we watch how SP500 handles this key level. After all, most stocks follow the overall market, and if SP500 breaks down and drags NASDAQ, it is going to be a problem. Thus far many leaders remain in good shape, and the market has been resilient despite the repeated distribution bouts at key levels. Surprisingly, NASDAQ is the brightest point in the upside, and it is still holding up quite well.
Support and Resistance
NASDAQ: Closed at 1922.90
Resistance:
October gap up point at 1952.
The 200 day SMA at 1962
January/late June down trendline at 1965
Price resistance at 2050
Support:
September high at 1921.
The low of the September range at 1900
The 50 day EMA at 1901
September gap up point at 1894
The October 2002/March 2003 up trendline at 1894
S&P 500: Closed at 1103.23
Resistance:
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 1126
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:
September low at 1101
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 9897.62
Resistance:
9980 to 10,000.
The 10 day EMA at 10,000 (stopped the Tuesday move)
The 50 day EMA at 10,112
The February/June 2004 down trendline at 10,235
The 200 day SMA at 10,282
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 19
Housing Starts, September (8:30): 1898K actual versus 1950K expected and 2020K prior (revised from 2000K)
Building Permits, September (8:30): 2005K actual versus 1950K expected and 1969K prior (revised from 1952K)
CPI, September (8:30): 0.2% actual versus 0.2% expected and 0.1% prior
Core CPI, September (8:30): 0.3% actual versus 0.2% expected and 0.1% prior
October 21
Initial Jobless Claims, 10/16 (8:30): 345K expected and 352K prior
Leading Economic Indicators, September (10:00): -0.1% expected and -0.3% prior
Philadelphia Fed, October (12:00): 18.0 expected and 13.4 prior
End part 1 of 3
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