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us stock market, trade stock
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11/17/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: SMH; JLG; FSL
Buy alerts issued: MEDX; PLMO; ENER; IWOV; VION; ECIL
Trailing stops issued: GYI
Stop alerts issued: ARO; AVIV
SUMMARY:
- Stocks surge on bounty of good news but then give half back.
- CPI not as bad as feared, market is relieved.
- Industrial production and capacity strong.
- Strong surge, but afternoon fade shows some volatility here at the heights.
- AMAT warns on orders and chip equipment stocks, techs in general, sold after hours.
Tuesday slide reversed on strong volume, but afternoon selling takes the luster off the session.
A bounty of positives hit the market Tuesday. Good earnings from tech and retail (HPQ, NTAP, JWN), a CPI that rose less than feared, a big retail merger (S and KMRT), strong production and capacity numbers, and surging housing starts gave investors plenty of ammunition to stem the Tuesday selling and put in buy orders. Stocks started stronger and continued to rally on strong volume. SOX and NASDAQ were up over 2%, SP500 was at a new 2004 high, and SP600 and SP400 were again at new all-time highs. All of this in spite of an oil inventory report that was much weaker than expected.
Well, at least for awhile. Oil inventors rose 0.8M bbl, much less than the 2M build expected. Distillates were down 1M bbl and gas fell 0.4M bbl. At first oil did little and stocks ignored the report. At around 1ET, however, oil shot higher. Almost simultaneously stocks started to sell. And they sold and sold until SP500 had given back over half of its gain and NASDAQ was approaching that level itself. A late bounce managed to put some polish back on the move, but it hardly erased the afternoon dive. The indexes finished with respectable gains, but nowhere near the strength they showed in the morning session as both price and volume surged.
While this action may mean nothing, we note that the market was in full retreat Tuesday, closing on the lows. It was reborn Wednesday on good news and reacted very favorably. It then gave back half of the gain. From selling to enthusiastic buying to afternoon selling. That is volatility and it can be a sign of two things. One, the market is still extended and when the market gets oversold or overbought it typically starts to show this up and down action. Or two, it is the Wednesday preceding expiration Friday and this is pretty normal action. This market is still bullish overall, but that does not mean it won't take normal pullbacks. The Tuesday morning rally shows investors still at the ready to move in, but the afternoon suggests stocks are still a bit extended. We will keep our stops tight and continue to look for opportunity when it arises.
THE ECONOMY
CPI shows not all PPI increases being passed along.
The CPI contained similarities to PPI, e.g. the core much less than the overall number that contained higher food and energy costs. Those producer costs, however, are not flowing through 100% to the consumer. The overall number rose 0.6% (0.4% expected, 0.2% September) while the core rose 0.2% (0.1% expected, 0.3% September). Energy was the key factor in the rise, up 4.2% (gasoline 8.2%, heating oil 8.1%). These gains, however, were less than half of the gains shown in the PPI. Food rose 0.6%, the largest gain since May and prompted by the destruction brought on by the summer storms.
Core CPI rose 1.7% for the past 12 months. The overall CPI was up 3.2% year over year versus the 4.4% gain in PPI. Again, that shows not all of the prices have been passed on, something not uncommon through the history of expansions. Businesses, wanting to keep customers, avoid passing along the entire cost increases. If price pressure continues to rise, more will be passed along, but not 100%. That is nothing new, and as always it is a factor of how high and how long prices rise.
The main ingredient to the price rise was energy, and those are backing off significantly this month. They are still higher than just six months ago and will have to fade into the thirties to take the heat off producers and consumers. Thus far they have not dug too deeply into consumers, but prices need to continue this drop or else that will happen. Again, it is a function of price and time; the longer the price stays at this level, even if it is dropping, the more impact it has on both consumers and producers.
Industrial production twice expectations.
After lying in seeming dormancy for months and months, industrial production has started to climb. Call it more confidence, more demand, less product or a combination of all three, but there is more factory activity ahead of the holiday season. Production (factories, mines, utilities) rose 0.6% versus a 0.1% rise in September. Each group posted a 0.7% gain showing there was no one area that grew at the expense of the others.
Capacity utilization hit 77.7%, easily topping the 77.4% expected and the 77.3% in September. This was the highest usage rate since May 2001, well before the 9-11 attacks extended the recession.
Both of these are more evidence in conjunction with the regional manufacturing reports that the economic expansion continues, and it is no longer a contracting expansion as it was through the late summer. The consumer and the businesses have both expanded their activity heading into the holiday season. We anticipated businesses becoming more active with the expiring investment incentives in the tax code. The consumer activity has held somewhat steady, but it is being bolstered now by better jobs creation (at least for October), lower oil, and an election that was over quickly as opposed to dragging into the holidays.
Housing starts boom.
2.02M annualized starts in October and a flurry of mortgage applications reaffirmed the strength of the housing market and the power of low mortgage rates. The housing market is continually written off, but just as the small cap index, it keeps hitting new highs. This continues to be a strong base for the economy as baby boomers buy second homes and generation X buys and upgrades their homes.
THE MARKET
The winds are stronger up here at the new highs for 2004. Tuesday they tried to blow stocks back down. Wednesday they blew stocks sharply higher on lots of good news, but in the afternoon some of the gains were blown away. One of the things we talk about in our seminars (a brand new set will be out soon) is volatility. Not the volatility measured by the VIX, but the day to day volatility the market undergoes when it reaches peaks or valleys. We like to call it the change in seasons, and it is most notable when there is a big change in the market such as in early 2000 where stocks surged on huge volume and then sold on equally strong volume. They did this on an almost day to day basis for awhile.
Just as when the weather gets really volatile when seasons change, the same happens in the market. It does not just happen at the major season changes, but also when a change in the weather pattern occurs mid-season as well. It is more subtle, but the action is the same: swings in both directions on volume. As noted, that happened Tuesday and Wednesday. Tuesday NASDAQ sold on rising volume, then Thursday stocks surged on very strong trade, giving back half of the move in most cases.
What we have to discern is whether this is related to the Friday expiration or is forecasting a more substantial pullback after this strong move higher. At this juncture the upside action has been stronger than the downside in volume, breadth, and leadership. Those are strong cards the bulls are holding, but that does not mean they cannot lose a hand or two during their hot streak. This just means we remain cautious, keep an eye on the leaders, and keep our stops reasonable, watching where they close the session. Thus far they are holding up pretty well, but we have not hesitated to cut a position if we did not like the action. That will cost us some gain in some cases, but we would rather protect what we have than risk gains, particularly as things look a bit more volatile near term.
Market Sentiment
Note how volatility has not risen even though the market has swung back and forth the past two sessions. This shows you that you cannot just watch VIX or VXN and think it tells the story. Where you are in a move, what historical readings are, etc. are all important.
VIX: 13.21; 0
VXN: 18.5; -0.1
VXO: 13.64; -0.36
Put/Call Ratio (CBOE): 0.65; -0.06
NASDAQ
Techs gapped higher on good earnings news with NASDAQ rallying to a new high in its base. It held that move but gave back a third of the gain. Tremendous volume.
Stats: +21.06 points (+1.01%) to close at 2099.68
Volume: 2.241B (+16.69%). Tremendous trade as tech stocks rallied sharply early. Volume faded in intensity in the afternoon selling, but it did not dry up; there was some selling on strong volume in the afternoon. This volume was more likely than not tied to the Friday expiration.
Up Volume: 1.718B (+915M)
Down Volume: 486M (-597M)
A/D and Hi/Lo: Advancers led 1.91 to 1. Solid, but nowhere near the 2.5:1 in the early afternoon.
Previous Session: Decliners led 1.67 to 1
New Highs: 183 (+37). Not many given NASDAQ hit a new recovery high off of its base low.
New Lows: 18 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Techs were on a mission early, up over 30 points heading into the afternoon. As with all stocks, they faded in the afternoon, rallying late to hold two-thirds of the session gain. The move pushed it over 2100 (psychological resistance) on the high (2112) and solidifying its move over the February high (2095). Though it gave back 2100 on the close, it held above the February high, and that sets up the try for a break over the top of the base at 2153.83. This action the past two days indicates it will need more rest before it takes that level on with a serious chance of breaking it. Then again, this rally rallies when it should rest. When the market runs like this we keep looking for opportunity and keep our stops snug.
NASDAQ 100 took out the January high earlier, but it put an exclamation point on the move with a strong gap higher Wednesday. Similar to NASDAQ overall, it has the recent volatility to deal with, but it can test back and has support at the prior high.
SOX broke through the 200 day SMA in the early afternoon but could not hold that move on the close. It won't clear it Thursday, at least based upon the reaction to the AMAT earnings and reduced order guidance after the close. Indeed, the entire tech index was under more pressure after hours on that news.
S&P 500/NYSE
SP500 surged to a new 2004 high (1188.46) but could not hold it into the close as it gave back half of the gain as volume surged.
Stats: +6.51 points (+0.55%) to close at 1181.94
NYSE Volume: 1.688B (+24.24%). Very strong trade as large and small caps rallied once more though the large caps failed to regain all of the Tuesday losses. The pullback off of the high as volume increased is not bullish price/volume action.
Up Volume: 1.252B (+889M)
Down Volume: 417M (-558M)
A/D and Hi/Lo: Advancers led 2.23 to 1. Very nice breadth as large and small caps rallied on strong trade.
Previous Session: Decliners led 1.63 to 1
New Highs: 409 (+184)
New Lows: 12 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps powered to a new 2004 high but then closed below the Friday close (1184.17), unable to extend the move over 1175, the second peak in the 2001/2002 double top. If it could have, the action would have been perfect: break through 1175 resistance, test on lower volume, then rebounding on strong trade. It did rebound on strong trade, but giving back half of the move and the new high showed it is not yet ready to say goodbye to 1175.
SP600 rallied to a new all-time high but gave back just enough to keep it below the Monday high (316.24). There is not much to say about the strength of small and mid-caps, but we do note that they are showing the same volatility as the other indexes. We also note, however, that it has had two other such incidents in the current run. Obviously, they failed to stall the move.
DJ30
DJ30 blew away the April high (10,570.81), rallying to 10,600 on the high. As with the other indexes, however, it could not hold that break. Strong volume thanks to HPQ helped propel the index higher, but it could not hang onto the triple digit gains enjoyed through lunch. There is a significant band of resistance at 10,600, and it showed itself Wednesday. Still could come back toward the 10 day EMA (10,420) to test the move, but it too is showing resilience even as things get a bit volatile ahead of expiration.
Stats: +61.92 points (+0.59%) to close at 10549.57
Volume: 295 million shares Wednesday versus 237 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Once more there will be no shortage of catalysts for investors to weigh Thursday. After hours AMAT announced earnings that beat the street but were light on revenues AND forecast much worse orders levels (down 35%) than expected. That was hammering the chip equipment stocks after hours, but other semiconductors and tech stocks were swept up in the after hours selling to varying degrees. Wednesday feasted on good earnings; Thursday we will see how strong the bulls are with the largest chip equipment maker weaker than expected.
There is also another bevy of economic data, particularly the leading economic indicators and the Philly Fed. Leading economic indicators have been leading lower the past few months, and the forecast is for another drop of 0.1%. With other sectors increasing activity we may see a modest upside surprise.
It will be an important session. Two opposite sessions back to back on an expiration week. Just volatility ahead of expiration or an indication of more of a pullback? We suspect a little of both as this is the action stocks have shown in recent previous expiration weeks and given the strong run to this point.
We expect techs to start under pressure given the AMAT earnings. Except for Tuesday, during this rally when stocks start soft that has brought in the buyers. The market could use more rest to better set up for the next move that takes on key points on NASDAQ and DJ30, but as we have noted of late, this rally does not languish for long before the money managers hot to put their money to work ahead of year end jump back in.
We will keep looking for opportunity with existing positions as they are already proven leaders and we like to average up into leaders. As money rotates we will continue to keep an eye on those emerging from bases as well. Wednesday there were many strong moves on volume that rallied and then faded late. They are still in good shape though you never like to have a stock come back on you when you enter. We will keep our stop points reasonable given the volatility seen the past two sessions.
Support and Resistance
NASDAQ: Closed at 2099.68
Resistance:
Price resistance at 2090.
January high at 2154
Support:
The April high at 2079
The 10 day EMA at 2059
2050, prior resistance, may provide some support on a test.
Some price points at 2000.
October high at 1971
The 50 day EMA at 1968
The 200 day SMA at 1952
The October 2002/March 2003 up trendline at 1924
S&P 500: Closed at 1181.94
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.
The 10 day EMA at 1168.92
January highs at 1158
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 1134.75
Dow: Closed at 10,549.57
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 10,420
September high at 10,342
The 200 day SMA at 10,244
The February/June 2004 down trendline at 10,195
The 50 day EMA at 10,188
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): 2027K actual versus 1960K expected and 1905K prior (revised from 1898K)
Building Permits, October (8:30): 1984K actual versus 2000K expected and 1998K prior (revised from 1998K)
CPI, October (8:30): 0.6% actual versus 0.4% expected and 0.2% prior
Core CPI, October (8:30): 0.2% actual versus 0.1% expected and 0.3% prior
Industrial Production, October (9:15): 0.7% actual versus 0.4% expected and 0.1% prior
Capacity Utilization, October (9:15): 77.7% actual versus 77.4% expected and 77.3% prior (revised from 77.2%)
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
End part 1 of 3
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