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us stock market, trade stock
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11/16/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: HOLL; HYSL
Trailing stops issued: KMRT; CMVT (one-half options)
Stop alerts issued: TKO
SUMMARY:
- Market gets a trigger to engage in some profit taking.
- PPI surges, but the pass through to CPI is the key.
- Current account deficit once more covered in spades by foreign demand.
- Mixed volume pullback as stocks hold near support.
- After hours upside earnings re-injects excitement.
- Subscriber Questions
PPI gives a reason to sell some stocks.
The PPI was blamed as the reason why the stock market was lower as commentators cited the hotter than expected number as somehow putting the brakes on the recent rally. Well, the brakes were already tapped Monday as the market was quite overbought. The PPI was an excuse, not the reason for the selling. With stocks sharply higher over the past month it was a good reason for short term investors to go ahead and move out of some positions that they were already uncomfortable with and ready to close.
Volume was lower on NYSE as SP500 and the smaller caps pulled back, and it edged slightly higher on NASDAQ though much of that volume came in the early afternoon when NASDAQ tried to stage a rally off the morning selling. Lower volume indicates fewer sellers than recent buyers, and that has been the dominant trend as the market rallies. Technically some distribution on NASDAQ Tuesday, but again, the rebound off the lows is where most of the volume came in on the session.
All in all stocks held near support in the pullback that, unlike the prior consolidation, looks to be more of a pullback than a lateral move. SP500 held the key 1175 level, but it could still come back further as one session is not really enough to give this rally the breather it needs. We want to see stocks hold this near support on the low volume they showed Tuesday. After hours stocks were rallying on a wide ranging group of solid earnings. It may be too soon for the market to start another leg higher, but timing is not one thing this market seems too concerned about.
THE ECONOMY
October PPI blows a chill on economists.
The 1.7% overall gain was the strongest in 15 years, well above the 0.6% expected and the 0.1% in September. Strip out food and energy and you see the number was driven by rising oil prices and fruits and vegetables as a result of the Florida storms. Energy costs jumped 6.8% with gasoline up 17% (biggest jump since June 2000), home heating oil 18%, diesel up 21%, and jet fuel up 17%. With oil falling $8 recently, this goose to the PPI probably won't last. Vegetables rose 34% and fruits 11%. Overall food prices rose 1.6%. As the storms fade, so will pricing pressure.
The core rose 0.3%, greater than the 0.1% expected, but also in line with September. Overall the core rose 1.9% ex food and energy for the past 12 months. Moreover, outside food and energy, two-thirds of the categories showed declining prices. Again, with energy falling and average gas prices moving back below $2/gallon this part of the price pressure won't last.
The key is whether these costs are pushed through to the consumer in Wednesday's CPI report. In past inflation fearing times, rising producer prices did not end up in consumer prices. Companies lacked pricing power and simply had to absorb much of the increase. With commodities hitting decade highs, it is doubtful as to whether that is the case this time. Washers and dryers cost more because steel costs more, but we also note that manufacturers are also absorbing some of that cost as well as they have specifically noted when they reported results the past two months. Consumers take on some of the increased cost, but the producer is still absorbing most of the materials price increases. We will know more about this Wednesday, but you can bet the overall CPI will be pumped up by those rising food and energy costs, and those are things that none of us can do without.
Current account deficit covered, again.
With the dollar hitting all time lows against the euro despite an EU economy that is woefully lagging the world, there has been a lot of talk about the current account deficit (the net of imports versus exports) and whether the low dollar would cause foreign investors to dump US investments in favor of other opportunities. We discussed this last week, one point of which was how many foreign economies have become geared toward feeding the US consumer. The last thing they want to do is cut off or jeopardize their primary economic income stream.
Whether that is good or bad is open for debate, but what it continues to do is keep foreigners buying US dollars, i.e. investing in the US. They are happy to do that in order to keep their economies that are linked to the US as healthy as possible. There is still the issue many raise that there is some tipping point where the current account gets so big that foreigners will sell out in fear, and with the gap approaching 6% of US GDP, that has them very agitated. There is no real historical evidence to support the fear, just a sense that there is a point where it becomes too much. There is always some truth to clich s, and the 'too much of a good thing' saying does hold some truth. Whether it does for the current account deficit has never been determined by actual facts, and if it does apply, no one knows what level will cause the collapse. It was said to be 5%, the 5.5%, and now 6% surely must be it. Judging by the most recent Treasury numbers, that is not the case.
Total foreign investment in the US for October was $63.4B, well in excess of the $59B in August. Investment in US treasuries jumped to $19.4B from $14.2B. Corporate bond investment soared to $44.6B from $26.5B in August. Those are very strong numbers as foreign investors scrambled to invest in the US as its economy continues to grow at a much faster clip than European and the Japanese economies. For now a 6% of GDP trade gap even with a low dollar is not enough to chase off foreign investors. Of course, it is probably all due to Treasury secretary Snow reiterating a strong dollar is in the interest of the US.
THE MARKET
A slowing upside move found a reason to book some gains Tuesday, and stocks were weak all session. Started weak, a midday rally was weak, and the close was weak. Fortunately NYSE volume was weaker as well though NASDAQ volume inched higher. You don't want to see volume start ramping higher as a run concludes, and the mixed volume Tuesday was not bad, but raises some caution.
There was another factor at work that most likely contributed to the selling and volume. Friday is expiration, and as we have seen the past several months, there is significant volatility the Tuesday and Wednesday preceding expiration as investors roll over positions and otherwise position for the next month. Late August, September and October all suffered a dip and some volatility and volume at the start of the third week. That in addition to some overbought selling was occurring Tuesday.
In times like these it is always good to look at leadership stocks, those stocks with good earnings and sales credentials that have been the favorite sons of a rally. Tuesday they were testing back as well, but mostly on lower volume and holding near support as you would expect them to do. They are in excellent uptrends, though some of those trends are getting a bit long in the tooth and will need a deeper test. Overall, with the rotation we have seen in the market, there are still many stocks early in their runs. While they may need a normal breather here, they are not ready for a deeper test. Again, the rotation we have seen in the stock market ever since the SP500 came to life provides continued lifeblood to the rally as stocks are at various stages of breaking out and running higher as money moves from one sector to another to another, etc.
Market Sentiment
VIX: 13.21; -0.17
VXN: 18.6; +0.1
VXO: 14; -0.21
Put/Call Ratio (CBOE): 0.71; +0.15. Put activity jumped on the first whiff of selling. That is a positive in a contrary sense though we suspect much of the activity has more to do with the coming expiration than in new positions to play any downside here.
NASDAQ
Gave back some of the rally on slightly rising volume, managing to rebound off the lows to recoup some losses.
Stats: -15.47 points (-0.74%) to close at 2078.62
Volume: 1.92B (+0.97%). Volume edged higher on the session, technically distribution. Much of the volume came on the rally off the lows, however, and a rise in volume is rather typical on the Tuesday and Wednesday preceding expiration Friday.
Up Volume: 803M (-569M)
Down Volume: 1.083B (+575M). Pretty evenly matched given the point loss.
A/D and Hi/Lo: Decliners led 1.67 to 1. Was in excess of -2:1 early, but a nice recovery to modest levels.
Previous Session: Advancers led 1.26 to 1
New Highs: 146 (-100)
New Lows: 23 (-9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ 100 was down a bit more than overall NASDAQ, but the losses were more or less reasonable given the rally to this point. Slightly rising volume was not what we wanted to see, but again, it is just before expiration. It closed just below the April high (2079), but a more 'normal' pullback would be toward the 10 day EMA (2050) and the June high at the same level (2048). After hours HPQ and NTAP reported strong earnings, and that had techs in general rising. Doubtful that will be enough to turn the market back higher so soon, but this market has outperformed expectations to this point.
Again, NASDAQ 100 sold a bit more (0.8% versus 0.7%). It has support at 1525 and 1500. As with NASDAQ, it will get some pop from the earnings after hours; QQQ had significantly cut its losses in after hours trade.
SOX gapped lower but rallied back all session, turning positive with two hours left. It could not hold the move, but the close was must modestly lower. Semiconductors were also getting some help after hours from the earnings.
S&P 500/NYSE
Struggled all session, trying several bounces off 1175 support, but never able to cobble together enough buyers to hold any of those bounces.
Stats: -8.38 points (-0.71%) to close at 1175.43
NYSE Volume: 1.359B (-6.24%). Good to see NYSE volume decline as both SP500 and SP600 sold and closed at session lows.
Up Volume: 363M (-409M)
Down Volume: 975M (+312M)
A/D and Hi/Lo: Decliners led 1.63 to 1. Pretty much held this level all session.
Previous Session: Advancers led 1.25 to 1
New Highs: 225 (-199)
New Lows: 10 (+1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps sold early and failed to hold any bounce all session. It gave back a final modest bounce in the last hour, closing at session lows. There is still quite a bit of downside momentum that will most likely carry the large caps lower toward to test through 1175 support down toward the 10 day EMA (1166) or the February and March highs (1156).
SP600 peeled back from its last all-time high leading the downside slide Tuesday and closing at session lows in a rather impressive 2.5 hour dive into the closing bell. As with the large caps, there is more downside momentum here at least to the 10 day EMA (309.81). It has outrun any support levels, so where it winds up depends upon the severity of this pullback. The 18 day EMA is at 305, another point to consider.
DJ30
The doji Monday gave way to selling Tuesday, but we note that volume was quite light, coming in well below average on the fade. That shows little selling interest, i.e. more profit taking. It closed near the session low, indicating further downside momentum. HPQ reported solid earnings after hours, however, and we will see if it can lead a rebound of the index. We would doubt that, expecting more of a pullback toward 10,400 (10 day EMA at 10,391) to 10,350 to set the next leg higher.
Stats: -62.59 points (-0.59%) to close at 10487.65
Volume: 237 million shares Tuesday versus 266 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
After hours earnings from HPQ, JWN, and NTAP had stocks rebounding for the lower closes seen across the board. They will be competing Wednesday with some heavy hitting economic data in the form of the CPI and industrial production and capacity utilization. After the PPI, the question is whether prices have been passed on to consumers. We all know that gasoline, natural gas, and food increases have hit, but the Fed likes to take those out of the equation and look at the core. You know, things we buy every day such as computers washing machines, clothes. We use computers a lot around my house, but we don't eat them and have to replace them on a weekly basis.
We suspect the overall CPI could beat expectations and put further pressure on stocks to compete with some good earnings news. Of course, oil prices have been falling this month and the CPI data is from September. Rational minds understand this, but ration is often overwhelmed in the short term. Rational minds also understand that commodity prices have been rising sharply, and producers won't be as reluctant to pass on some of that cost with each product.
We anticipate that near term momentum will remain down, overcoming any early upside bounce from earnings. If CPI is less than expected that could join with the earnings to reignite the rally. If that happens, so be it. Realistically we don't expect that, so we will continue to look at support levels and volume on a continuation of the downside move.
Most of our positions held near support Tuesday on lower volume. In general, when stocks are in strong uptrends we will let them test near support (if they are not way out ahead of support) and continue the run as long as they come back on lower volume and the overall action is orderly (not bouncing up and down day to day, a sign a run is topping). Wednesday we may see a push below that near resistance and then a rebound. Again we will be watching volume levels closely, but this has the looks of a pre-expiration jostle as well as a more or less normal pullback after a strong run. It can get both of them over in one move, not a bad deal.
Support and Resistance
NASDAQ: Closed at 2078.62
Resistance:
The April high at 2079.
Price resistance at 2090.
January high at 2154
Support:
2050, prior resistance, may provide some support on a test.
The 10 day EMA at 2049
Some price points at 2000.
October high at 1971
The 50 day EMA at 1963
The 200 day SMA at 1952
The October 2002/March 2003 up trendline at 1922
S&P 500: Closed at 1175.43
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1175 second high in that double top that spanned late 2001, early 2002.
January highs at 1158
The 10 day EMA at 1166
1142-1146 are the June highs.
1130 acted as some resistance on the move higher.
1128 to 1125 the September closing high.
The 50 day EMA at 1132.82
Dow: Closed at 10,487.65
Resistance:
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
Late April, June peaks at 10,478 to 10,512
The 10 day EMA at 10,391
September high at 10,342
The 200 day SMA at 10,244
The February/June 2004 down trendline at 10,185
The 50 day EMA at 10,174
9980 to 10,000.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 15
NY Empire State Index, November (8:30): 19.76 actual versus 20.6 expected and 17.43 prior
November 16
PPI, October (8:30): 1.7% actual versus 0.6% expected and 0.1% prior
Core PPI, October (8:30): 0.3% actual versus 0.1% expected and 0.3% prior
November 17
Housing Starts, October (8:30): 1960K expected and 1898K prior
Building Permits, October (8:30): 20000K expected and 1998K prior
CPI, October (8:30): 0.4% expected and 0.2% prior
Core CPI, October (8:30): 0.1% expected and 0.3% prior
Industrial Production, October (9:15): 0.4% expected and 0.1% prior
Capacity Utilization, October (9:15): 77.4% expected and 77.2% prior
November 18
Initial Jobless Claims, 11/13 (8:30): 333K expected and 333K prior
Leading Economic Indicators, October (10:00): -0.1% expected and -0.1% prior
Philadelphia Fed, November (12:00): 23.2 expected and 28.5 prior
SUBSCRIBER QUESTIONS
Q: I'm curious about [a] buy point for PWAV. They've been basing, it seems to me, at June 2004 resistance ... fairly minor resistance. If I'm reading the chart correctly, they have much stiffer resistance around 8.50. Wouldn't they have a much more difficult time busting through this challenge, requiring huge volume (ie around 4M - I have them at a 30/90 day average volume of nearly 2M) and friendly market conditions?
http://www.investmenthouse.com/cd/pwav.html
A: The lower buy point you reference is just over the early October high (8.13), a point the stock has moved laterally below the past two weeks. There is stronger resistance at the May high near 8.50, but a stock that has based out between that last resistance has worked off a lot of the overhead supply built earlier in the base. The price/volume action on PWAV is great: Note how volume dried up in August, September and early October before swelling as it started the right side of its base. That shows us that a lot of the overhead was worked off as there were no more sellers during that long stretch. Now we see buy side volume coming in as the stock rallies. It is then easing off at that May peak, moving in a very tight range on low volume; again, very few sellers. Thus if we see volume surge as it moves through the recent peak, we can feel pretty good about it having the strength to clear that prior high.
End part 1 of 3
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