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10/21/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Thursday: VRSN; EBAY; DRIV
Buy alerts issued: PER; SMH
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- NASDAQ, SOX, small caps put some muscle behind rally, but large caps still lag.
- Jobless claims strengthen, regional PMI better, but leading indicators lower again.
- SOX pitches in as tech rally catches some fire.
- Wednesday earnings spark buying after hours, Thursday's don't.
Bifurcated action as techs take the lead again while large caps lag again.
The Wednesday after hours earnings had technology stocks ready to rally, but by the open the excitement had died down and stocks traded mixed in some very choppy action. Support held, however, and SP500 bounced off 1101 support. Staying with the choppy theme, however, the indexes peaked midmorning and slid into a 2.5 hour decline that saw the large caps undercut the September low for the second straight session. Once, more, however, stocks found support and rebounded into the afternoon to new session highs. A late pullback kept SP500 from a decent gain, but NASDAQ scored well, helped by SOX and the small caps along with a big volume surge.
The economic news had little impact though the market dipped both after the LEI (leading economic indicators) at 10ET and the Philly Fed at 12ET. The ultimate action was ruled by earnings. Tech and internet earnings were well received while the industrial earnings were not (e.g. CAT). That was basically the story of the session: techs good, industrial stocks weak. Even then all indexes but DJ30 (weighed down by CAT) closed positive
Still, SP500 is going to have to improve its performance. Two modest gains in volatile sessions still finds SP500 just over the September low and below key resistance levels such as the 50 day EMA and 200 day SMA. While NASDAQ moves up to challenge its 200 day, SP500 is still trying to find firm footing at 1100. Bifurcated markets can rally, but obviously not with the same vigor when all stocks are caught in a rising tide. Perhaps NASDAQ can pull enough to get the large cap indexes to shake off their insurance worries and follow. Thus far the positives on NASDAQ have only kept SP500 from falling; that is still a ways from rallying.
Thus there were two pictures Thursday, one quite pretty with NASDAQ and SP600 gaining over 1% and SOX surging 4% on strong volume, and another with large caps struggling to hang on until the news cycle regarding insurance and health care shenanigans passes.
THE ECONOMY
Initial jobless claims show solid improvement sans hurricanes.
After weeks of basically worthless data skewed by the series of storms hitting Florida, the East Coast, and the Gulf Coast, jobless claims finally had a chance to post a better view of the market after a quiet period. Jobless claims came in at 329K, well below the 345K expected and the 354K the prior week. This is getting to a level of significance for the unemployment report.
Recall back in 1999 how concerned the Fed was as the weekly jobless report was near 300K. Remember, the jobs report was OVER 300K at that time and the Fed was saying how 300K was a critical level because below that point the job market was too tight and there was the threat of 'wage led' inflation. Whether 'wage led' inflation even exists is debatable, but the point is that the Fed was worried as the weekly report got to near this level that the job market was tight.
As the jobless reports move away from 350K down to 330K to 300K, that is a good indication that there is job creation whether or not it shows up in the employer survey. When the economy goes through a fundamental shift as it has done in this recession and transition where the big tech companies become similar to Xerox, Sears, etc., a lot of the new jobs are not traditional the employer/employee ones measured by the non-farm payrolls. Yes there are people falling off the weekly claims report and that accounts for some of the drop, but as tested through many, many years of prosperity, recession, and recovery, when weekly jobless claims start hitting these levels that is an indication that jobs are being created whether or not the feds are picking them up on their radar.
The report will need to hold at this level for a few weeks, showing a trend is being established. That is important because of the recent renewed layoff announcements could start pushing the number higher if there is insufficient job creation to sop up those layoffs as well as the existing unemployed. It is too early from this one number to conclude serious job creation has resumed as it did early this year, but the data is starting to get encouraging.
Philly Fed rebounds sharply.
This important regional manufacturing index surged past expectations in October, reporting a 28.5 reading versus the 18 expected and 13.4 in September. Big jump, but the market was not that excited. Indeed, stocks sold on the news. The problem was with the employment aspect of the report that fell 6%. In addition, the outlook for the next six months faded as well. Talk about looking for problems. Would investors have preferred a report that was at expectations with the same or lower employment readings? Hardly. As we saw when the economy emerged from the recession, the activity picks up before the hiring. Hiring is always last. Given that the economy slowed considerably during the summer and the regional manufacturing reports are just the past two months showing a resumption of the improvement, it is not surprising jobs are again lagging while the data starts to rise again.
September leading indicators fall for fourth consecutive month.
Even as the October regional manufacturing reports show some life, the leading indicators from last month forecast a continued slower expansion in the economy. September's -0.1% was in line with expectations and much better than the -0.3% reported in August. This tells us nothing new really, as the ECRI weekly measure of leading indicators continues to forecast a slowdown in 2005. Q3 will be much better than expected with the strong retail demand, and Q4 will be solid with the business spending ahead of the investment incentive expiration, but there is not much beyond that showing up to spur continued growth.
THE MARKET
Semiconductors surged through resistance pretty much across the board, helping push NASDAQ to a nice gain on strong volume. While the large cap industrial stocks traded weakly once more, large cap tech stocks ere strong, posting a much better gain than NASDAQ (1.1% NASDAQ, 1.6% NASDAQ 100). The small caps were rallying as well, posting a 1.3% gain. When those three perform the market performs. Unfortunately, they have not performed consistently this year.
The big difference Thursday was the strongest move from SOX since the first session of the month, pushing it to a post September low closing high with two higher lows along the way. With this kind of help NASDAQ has some support as it takes on its 200 day SMA and the January/June down trendline, the last down trendline to take out since the January 2004 peak. The SOX participation along with the strongest trade since July is setting the stage for that showdown. Unlike SP500 and DJ30, NASDAQ is in better position to take on that resistance.
Market Sentiment
VIX: 14.54; -0.31
VXN: 20.36; -0.29
VXO: 14.99; -0.11
Put/Call Ratio (CBOE): 0.83; -0.02
NASDAQ
Slow start led to a strong finish as volume surged and pushed NASDAQ toward the top of the recent range to take on very key resistance.
Stats: +20.65 points (+1.07%) to close at 1953.62
Volume: 2.036B (+21.73%). Volume exploded higher, its best showing since some mid-July selling. Some more short covering as the chips broke higher, but there was longer term buying as well as leaders extended their moves higher.
Up Volume: 1.5B (+505M)
Down Volume: 511M (-149M)
A/D and Hi/Lo: Advancers led 1.63 to 1. Relatively modest breadth indicating that indeed some of the action was short covering.
Previous Session: Advancers led 1.28 to 1
New Highs: 99 (+43)
New Lows: 55 (-22)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher but also filled the gap intraday before reversing and rallying to close near session highs. NASDAQ made a higher low as it recovered from the Tuesday reversal and is now pressing toward key resistance at the 200 day SMA (1961) and the January/June down trendline (1965). The strong volume is a good sign as it approaches this level that will either register a breakout over the downtrend and set the stage for a rally into year end. So far it is doing what it has to do and doing it with some flare.
NASDAQ 100 was impressive, posting the base gain of the techs and clearing, but a gnat's rear end, the early October closing high.
SOX bolted through 400 and easily cleared the October closing high. As with NASDAQ, it has made a higher low and is ready to challenge 425 and even 450.
S&P 500/NYSE
A positive close, but that is about all as the large caps continued to suffer the insurance and health provider lawsuit scare. A fight to hang onto that late September closing low.
Stats: +2.83 points (+0.26%) to close at 1106.49
NYSE Volume: 1.672B (-0.99%). Disappointing trade, unable to generate enough buying enthusiasm to hike volume.
Up Volume: 1.083B (+244M)
Down Volume: 577M (-236M)
A/D and Hi/Lo: Advancers led 2.11 to 1. With the small caps posting one of the best gains of the indexes, breadth was excellent. Moreover, given the large cap weakness and that small cap strength, the short covering on NYSE was limited. Of course, the SP500 gain was limited as well.
Previous Session: Advancers led 1.16 to 1
New Highs: 117 (+77)
New Lows: 45 (-28)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Once more SP500 tested below the late September low (1101) and managed a rebound to close positive. Volume was lower but still very strong, showing another surge of buying as it broke below that support level. The rebound to hold above that September low was about all it had, however, as it was unable to take out the 50 day SMA. Quite anemic action on the heels of a potential reversal session, but often the next upside action comes several sessions down the road. Thus SP500 could show us the real follow through this coming week as long as it can close out this week without undercutting the September low on the close. It will need it; after two sessions of struggling, SP500 is still barely hanging on and has a lot of resistance at the 50 day EMA (1113) and the 200 day SMA (1120).
DJ30
Once again the blue chip index cannot catch a break. This time it was CAT as the big seller on volume as its earnings disappointed. Another intraday reach toward the August lows (9814) and then a rebound to recoup most of the losses. No oversold bounce yet, and that was not a good sign from an index that is still struggling at the bottom of the base. Primed for a bounce, but showing no inclination to do so.
Stats: -21.17 points (-0.21%) to close at 9865.76
Volume: 272 million shares Thursday versus 272.6 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
While the Wednesday after hours earnings excited investors, Thursday did not appear to have the same effect. GOOG was up but AMZN and MSFT were down. We are in the heart of earnings, and after a cool reception early, investors have started to warm up, particularly to techs. They have a lot of work as they are carrying the large caps, or at least having them hold the line.
In addition, techs have to deal with some serious resistance as they approach the 200 day SMA and 2004 down trendline. That will be challenge enough without having to drag SP500 around like a dead weight. SP500 could spring to life next week, but other than the reversal after undercutting the September low, it has failed to show more.
Overall stocks, particularly techs and small caps surged for the second session. Another move higher by NASDAQ to the 200 day SMA and down trendline will likely result in a pause given the surge to this point. That also puts NASDAQ near the early October high, another point of natural resistance. Very critical levels that would naturally cause a pause. It can always surprise with a straight run through that resistance; the Thursday volume certainly indicates enthusiasm in the tech sector.
To this point the moves higher have been strong and the moves lower have been strong. Stocks rally and then reality of high oil prices or some other event slaps them back. We continue to see good stocks moving well, the leadership factor, and that is the lifeblood of any rally. As NASDAQ approaches next key resistance and as there was some selling on the after hours earnings Thursday, we could see a softer open Friday. That would be a prime opportunity for NASDAQ to continue the rally or at least lay some groundwork for next week with a modest session holding the gains below this resistance. It may be able to pick up some help from SP500 at that point.
Support and Resistance
NASDAQ: Closed at 1953.62
Resistance:
October gap up point at 1952 is not completely broken.
The 200 day SMA at 1961
January/late June down trendline at 1965
October high at 1971
Price resistance at 2050
Support:
September high at 1921.
The 50 day EMA at 1904
The low of the September range at 1900
September gap up point at 1894
The October 2002/March 2003 up trendline at 1896
S&P 500: Closed at 1106.49
Resistance:
The 50 day EMA at 1113.32
The 200 day SMA at 1119.77
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 9865.76
Resistance:
9980 to 10,000.
The 10 day EMA at 9959 (stopped the Tuesday move)
The 50 day EMA at 10,094
The February/June 2004 down trendline at 10,225
The 200 day SMA at 10,275
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 and 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): 329K actual versus 345K expected and 354K prior (revised from 352K)
Leading Economic Indicators, September (10:00): -0.1% expected and -0.3% prior
Philadelphia Fed, October (12:00): 28.5 actual versus 18.0 expected and 13.4 prior
End part 1 of 3
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