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money investment, investment help
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11/22/04 Investment House Alerts Report
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IH Alert Subscribers:
HOLIDAY SCHEDULE
Saturday through Tuesday: Market summary, best plays (new & current), continuing play table summary.
Wednesday: Market summary, continuing play table summary.
Monday: Full reports resume as usual
MARKET ALERTS:
Target hit alerts issued Monday: DHB
Buy alerts issued: RMBS; CLF
Trailing stops issued: SNDA; BYD; CAND; SGMS
Stop alerts issued: PER; CMTL
SUMMARY:
- Stocks follow through on Friday selling, rebound for positive close.
- Dollar worries continue, but there are pros and cons.
- Stocks undercut support early, rebound to hold key levels.
- Not counting out strength of holiday week.
Afternoon rebound holds back selling tide.
Stocks continued the Friday selling Monday morning, higher oil prices helping fuel the selling. Stocks started to struggle last week as oil's slide turned into a bounce. Friday oil surged and prices dropped. The same scenario was playing out Monday with oil approaching $50/bbl once again. Then oil reversed course and stocks came to life, rising through lunch and into the close. Stocks reversed their losses and closed positive. The small caps led all session, posting gains early when the rest of the market sold. SOX lagged all session, but in the last hour it rallied with the market and posted a modest gain.
Good to see the intraday bullish bias return as buyers stepped into stocks as they tested and slightly undercut near support. Stocks had shown this bullish action all during the rally up to late last week, and it is an indication that buyers are still there, looking for the opportunity to step into more positions. Volume backed off, not an uncommon occurrence following expiration Friday. It was still above average on NASDAQ, indicating still a lot of interest even outside of a holiday week. SP500, however, could not muster average trade on its rebound. Interest yes, conviction no. Buyers will still have to step back in with more force. For now, even with the Monday bounce, we have to be wary of a further pullback at this stage.
THE ECONOMY
Oil and the dollar dominated the economic talk Monday. Oil started higher, continuing its rebound from last week. By the close, however, it had reversed lower and stocks moved inversely. That helped in the afternoon rebound, though volume was deficient.
The dollar was once again a major concern, particularly after Greenspan's Friday speech regarding currencies and the impact of the US trade deficit. We will look at some pros and cons to a weaker dollar.
Is a falling dollar inflationary, and can it self correct?
One of the first problems a falling dollar can bring is inflation. The reason is that a falling dollar requires more dollars to buy foreign goods. In short, a falling dollar makes foreign goods costlier, raising the CPI. Of course, the theory is that higher prices mean less buying of those goods and more focus on domestically produced goods and services. At the same time foreign consumers buy more US goods because prices are lower as the dollar declines versus their currency. Thus the trade deficit problem has a self-resolving mechanism in it: the gap gets larger, the currency on the deficit side sinks, less goods are imported, more are exported, and the gap closes or shrinks to acceptable levels.
That is theory. Reality has some kinks in it. First, some of our major trading partners that make up most of the gap have their currencies tied to the dollar. In other words, their currency rises and falls with the dollar, and thus the gap with those countries remains the same regardless of the dollar's value. Thus with China, the change in the dollar has no effect on making goods more affordable in that country because the yuan moves in lockstep with the dollar. On the positive side, goods imported from China are no more expensive due to a falling dollar. Thus we don't get any gain from a falling dollar with our trade gap, but it does not hurt us. It is the trade with other countries that do not tie their currency to the dollar where a decline is inflationary. With respect to those, the decline will eventually start to rectify itself.
Second, as long as the US economy remains strong and its consumers are confident, a lot of foreign goods will be consumed. It is historical fact that US consumers buy a lot of foreign and domestic goods when they consume. If the dollar does get very low consumers will cut back on buying foreign goods such as autos, but as of now that is not the case. Indeed it has not bee the case for decades.
So, in theory a weaker dollar cures the problem of the deficit that was caused when the dollar was stronger. That does historically work, but again, with China a major trading partner and one with which we enjoy no benefit from a falling dollar, the trade gap does not improve and inflation is a consequence.
Just how weak is the dollar in historical terms?
Another issue is the strength of the dollar itself. There is wailing regarding the dollar versus the euro, but with respect to other currencies the dollar is not at a low. Indeed, the dollar is still about 10% above the level where it bottomed in 1995 against the German marc during that dollar decline during the Clinton administration. In reality, that has to be the benchmark by which the current dollar/euro exchange rate is measured as the euro is still much too new to tell us much about the relative value of the two currencies. Certainly the EU economies are not strong enough to support the gains the euro has made versus the dollar. That suggests a lot of speculation in the currency exchange just as there was in the oil market the past several months. As noted over the weekend, the dollar is still at the 30 year average of value with respect to a basket of other currencies. Thus this level of the dollar is hardly a crisis level. If it continues to plunge, then there is an inflationary affect.
How do you solve the trade gap problem?
It is interesting to hear the talk about the problem of the weaker dollar and the trade deficit. If we accept the premise that the gap is a bad thing, something that has not been shown with any concrete historical evidence, then what is the cure? Over the weekend we talked about Greenspan and the Fed 'solving' the problem with rate hikes to make foreign investment more attractive.
That is not a solution, just a method to keep foreign investors interested so they will cover the gap. Indeed, taken to its logical extreme, i.e. the Fed overreacting and raising rates too far, the higher rates would ultimately detract investment as the Fed would raise rates too far and stall the economy. No one wants to invest in a recessionary economy unless rates are extremely high. With Fed Funds rates at 2%, the Fed would have to hike rates at least another 300 basis points even to make things really attractive, and that would crush the economy. If the Fed kept raising to attract foreign capital seeking interest income, that would result in stagflation, i.e. a recession along with high interest rates. That would correct some of the problem as US consumers would buy fewer foreign goods in a recession, but those foreigners wanted to invest in the US for other than interest income would look elsewhere. In other words, you get some benefit in one area but lose in another so the net benefit is problematical. Indeed, it is much like the Fed hiking rates in order to prevent inflation caused by rising oil prices resulting from a cartel increasing prices arbitrarily; raising interest rates won't impact the cartel's decision unless they are raised enough to stall the economy and demand for oil tanks. Unless the Fed wants lower prices at the cost of economic expansion, this is not a viable option.
Another way is trade restriction, but that never solved anything. It just ensures inflation by making US consumers pay more for goods they could get cheaper overseas. That is just another way to higher prices as well as stifling innovation, both hurting our economy. Indeed, the current tax structure should be changed so that our corporations are not handicapped against foreign competition from the start. That would help make our goods more attractive up front as they would not bear that additional tax burden as a cost.
As with all things regarding a free economy, the way out of a problem is to focus on growing the economy. After all, US consumers buy a lot of foreign goods unless we are in a deep recession where the consumer stops buying. No one wants that kind of economy. Thus, if we accept the premise that we want an expanding economy, the way to shrink the trade gap is to grow the economy so that the trade deficit is a smaller percentage of the overall economy. After all, the only worry regarding the trade gap and thus the falling dollar as impacted by that trade deficit is the size of the gap versus GDP. A strong, expanding economy will attract more foreign investment for any number of reasons. Moreover, if it outpaces growth in the gap as it historically does, the gap shrinks as the economy grows.
Thus a growing economy combined with spending restraint and serious 'non-discretionary' spending reform will do more for improving the strength of the dollar, the budget deficit, and the trade deficit than any clumsy interest rate-based policy simply because it sets the foundation for the growth engine that has always made the US economy the strongest in the world. That is very hard, indeed foolishly hard, for foreign dollars to avoid. Even with the current gap and deficit, foreign investment is still pouring into the US. Imagine what a solidly growing economy with these key areas of improvement would attract.
What Greenspan was saying Friday (hopefully).
We have concerns about what Greenspan was getting to with his speech and comments last Friday. The part about investors should be well-hedged against higher interest rates is really bothersome, and not easily explained away.
In any event, a major theme of Greenspan's has been reducing spending in all areas of government while still maintaining the growth incentives for the economy. That is a message of economic growth and fiscal responsibility that would obviate the need for any draconian interest rate measures by the Fed. Indeed, it appears that the Fed was holding up two stark choices for Congress and the administration: get your spending house in order or the Fed may be forced to do it for you. Again, the danger is that Congress will only heed half the warning and kill off what makes the economy grow, i.e. lower tax rates and streamlined and reformed programs. In other words Congress will want to cut the things that put money in our pockets as opposed to its coffers to spend. Greenspan will have to clarify what he wants to Congress, but even then, when it comes to money in Congress' pocket versus ours, you know who usually loses. Unfortunately, it is not only a short term loss from raised taxes, but a longer term loss as the economy slows as the investment money it needs is bled off into Congress.
THE MARKET
There were some bright spots in the Monday trade. The bullish intraday action was a plus with the morning selling and reversal to close positive. Another was the leadership role once more assumed by the small caps. What has been forgotten in this move since the large caps recovered in late October and early November is that the small caps have led for over a year, and they continue to lead. Small caps do well in an expanding economy, and an economy that is expected to expand into the future. Thus we view that action as a continued strong positive for the market overall.
Bigger picture, stocks remained in an uptrend, helped by that Monday rebound. They are also still in a near term fight, however, as they try to move through last week's volatility and rougher trade on some unexpected news from the Fed chairman. Of course, there is also the rebound in oil prices, something the market has not dealt with well this year. Thus Monday was a start to a resolution of last week's rougher trade, but it was no answer in itself.
Market Sentiment
VIX: 12.97; -0.53
VXN: 18.77; -0.95
VXO: 13.58; -1.02
Put/Call Ratio (CBOE): 0.73; -0.08
NASDAQ
Tapped toward the 18 day EMA and then rebounded for a nice gain on lower, but hardly shabby volume.
Stats: +14.56 points (+0.7%) to close at 2085.19
Volume: 1.933B (-5.28%). Modest volume decline though still comfortably above average. You always want to see a volume selling session met with stronger trade; all things considered this was not a weak session, but it leaves the Monday bounce a bit light in the saddle.
Up Volume: 1.225B (+590M)
Down Volume: 680M (-702M). Decent up to down volume ratio.
A/D and Hi/Lo: Advancers led 1.45 to 1. Modest breadth, well below the Friday selling level.
Previous Session: Decliners led 2.1 to 1
New Highs: 137 (+31)
New Lows: 25 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A good hold over the 18 day EMA and recovery to hold the 10 day EMA (2071) on the close. Solid intraday rebound off the June high (2048), a key interim high in the 2004 base as it was the last lower high. A very good point to find support and continue the move higher to take on the high in the base (2154). Volume was lower as noted, and thus it may not be ready to make the move. Holding near support on the low and rebounding is good action to build upon.
NASDAQ 100 large caps sold more than the overall NASDAQ Friday, and Monday they rallied more than the overall NASDAQ. Good hold over the 10 day EMA and then rebound to close at session highs. Good but needs more upside volume.
SOX tapped the 10 day EMA on the low and then rebounded for a modest gain. Setting up for another try at the 200 day SMA (440.84).
S&P 500/NYSE
Sold below the 10 day EMA but then rebounded though on low volume.
Stats: +6.9 points (+0.59%) to close at 1177.24
NYSE Volume: 1.391B (-8.75%). Volume was the disappointment as the small caps led the rebound. Not a failure, but some above average volume as with NASDAQ would have been what we preferred.
Up Volume: 942M (+577M)
Down Volume: 428M (-725M)
A/D and Hi/Lo: Advancers led 2.18 to 1. The small caps helped lead the composite breadth higher.
Previous Session: Decliners led 2.52 to 1
New Highs: 201 (+67)
New Lows: 10 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Continued selling below the 10 day EMA (1172) but reversed for a gain, moving over the key 1175 level. As noted, the volume was the Achilles' heel though hardly fatal at this stage as it pulls back to test this move. It sure looks like an 18 day EMA (1162) test before this pullback is over, a level roughly coincident with the January to March highs (1155 to 1158).
The small cap SP600 made the deeper test of the 10 day EMA (312.59) then rebounded Monday, leading the market and just missing a new all-time closing high (316.24). A week long lateral move, holding most of the gains with resistance at 316 to 317. Providing leadership once more, and this 10 day EMA test may be as far as they come back.
DJ30
A bounce, but a low volume, below average one that did little to reverse the Friday sell off. Once more the blue chips held the 10 day EMA (10,457) on the close, a level also roughly coincident with the June high (10,480). This was not the last high in the base; if it could hold here it would show good strength. With this low volume bounce, it could still find the 18 day EMA (10,368) or September high (10,342) before it is ready. Again, a hold here at the 10 day EMA would be a sign of real strength.
Stats: +32.51 points (+0.31%) to close at 10489.42
Volume: 240 million shares Monday versus 275 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Volume was lower Monday, but after an expiration Friday, with NASDAQ volume well above average, it was not a bad showing. Friday was a distribution session, but it had other factors including that expiration working it lower. You have to be impressed with the recovery from the early selling that looked as if the Friday pullback was going to ramp into a much stronger pullback. It may still do that; outside NASDAQ, the volume was pretty anemic.
Despite its drawbacks we did like the solid rebound off near support. It was enough to shake out a lot of the sellers; we hung in there the best we could though we had to close some positions that were breaking lower and not recovering. That ability to reverse the follow through to the Friday selling was key. It may not lead to an immediate rebound and resumption of the rally, but it shows the buyers are still ready to enter this rally.
We also cannot forget this is the Thanksgiving week, a week that often sees a positive move. There is a lot to be said for seasonality as we have once again seen this year. Despite a 10 month base stocks bottomed in late summer (NASDAQ) and October (DJ30) and started the current move toward the end of the year. That will keep us looking for solid moves off tests of breakouts and even new breakouts from good patterns. We are still concerned this may pullback further, but we saw that solid action from the small caps that shows us there is still the same bid under this market that helped drive it higher since August.
Support and Resistance
NASDAQ: Closed at 2085.15
Resistance:
Price resistance at 2090.
Some resistance at 2100.
January high at 2154
Support:
The April high at 2079
The 10 day EMA at 2071
2050, prior resistance, provided some support Monday
The 18 day EMA at 2045
Some price points at 2000.
October high at 1971
The 50 day EMA at 1981.95
The 200 day SMA at 1953
S&P 500: Closed at 1177.24
Resistance:
1175 second high in that double top that spanned late 2001, early 2002 was cracked again.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 10 day EMA at 1172.42
The 18 day EMA at 1162.
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 1139.52
Dow: Closed at 10, 489.42
Resistance:
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:
The 10 day EMA at 10,457
The 18 day EMA at 10,386
September high at 10,342
The 200 day SMA at 10,245
The 50 day EMA at 10,244
The February/June 2004 down trendline at 10,185
9980 to 10,000.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 23
Existing Home Sales, Oct (10:00): 6.75M expected and 6.75M prior
November 24
Durable Orders, October (8:30): 0.5% expected and 0.2% prior
Initial Jobless Claims, 11/20 (8:30): 335K expected and 334K prior
Michigan Sentiment-Rev., November (9:45): 96.0 expected and 95.5 prior
Help-Wanted Index, October (10:00): 37 expected and 36 prior
New Home Sales, October (10:00): 1200K expected and 1206K prior
End part 1 of 3
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