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trading system, option trading
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11/23/04 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:
Trget hit alerts issued Tuesday: FLR (took some interim option gain)
Buy alerts issued: TLM; FRGO; DRIV; NTGR
Trailing stops issued: None issued
Stop alerts issued: CNCT; AVP
SUMMARY:
- Intraday swings end on a higher note.
- Quiet economic session with existing home sales in line.
- IMF downgrades 2005 world economic growth on high energy, US deficit.
- Volume mixed, but stocks continue to consolidate holding most of their gains.
- Pre-Thanksgiving finds stocks still consolidating their rally gains.
Stocks up and down, managing to finish near the highs.
Large point swings were the rule for the day. NASDAQ rallied 10 points, gave back 20 points, rallied another 20 points, gave back 10, etc. It was a seesaw session with the last swing mostly up. That managed to close stocks near their highs, another decent recovery that kept stocks in their recent range, consolidating the strong run from late October. As we have said before, when stocks stingily hold onto their gains after a run, that is a sign of strength.
They are not clearly consolidating in a perfect way. Distribution Friday, a lower volume bounce Monday, higher volume as NASDAQ closed basically flat. The latter can be classified as churning, i.e. where an index is at a peak and trades in a narrow range on high volume. What that means is that stocks were trading hands rapidly, finding it hard to find a home to stay. What we saw intraday was volume advancing solidly as NASDAQ recovered late in the day. In addition, NYSE volume, though slightly higher, was still below average, indicating no churn. That was good and bad. Good because SP500 was lower, not so good because SP600 and SP400 led the market again. So what was the result re volume? We would have preferred to see a low volume move laterally as the best action, but overall it was nothing that indicated impending disaster.
One thing notably disappointing is the inability to extend the rally during the holiday week. Perhaps that is asking too much with the strong move leading into the week; the market is taking a needed breather after that strong run, and volatility is often an indication that the consolidation is not yet ripe. Things typically quiet down into a narrow range, indicating that the buyers and sellers slugged it out and the sellers have been weeded out. Then the time is right for the next advance. Thus it would appear there is more consolidation necessary over the next week, but this market has surprised just about each leg higher during this run. In other words, when it looks as if it needs more rest it starts higher once more.
THE ECONOMY
Existing home sales in line.
October existing homes, 80% of the housing market, registered 6.75M annualized units, right in line with expectations. Lower rates in October and November are spurring home buying, and since sales are not registered until the actual closing, many of those purchases made during those months will show up later. That means the market will still show solid sales in the months to come as those contracts turn into closed sales.
In short, the housing market remains solid, a testament to lower interest rates, low inflation, and economic growth. The question is whether interest rates will stay low. The Fed is taking back earlier rate cuts and will continue to do so. Originally the conventional wisdom said it was simply going to remove stimulus. After Greenspan's speech Friday, there is the concern there will be some interest rate hike kickers designed to encourage foreign investment in the US. Again, that appears premature and a foolish use of rate hikes. Foreign investors are currently more than happy to invest in the US as the latest numbers from last week show. Even with a trade gap at 6% of GDP, foreign investment is surging. Moreover, using interest rates as the methodology to obtain further confidence in foreign investors is simply ludicrous. Raising rates slows the economy; higher interest rates but less growth opportunity? Yes, I want to invest in that kind of stagflation environment.
Greenspan was in all likelihood making a statement regarding the need to reduce federal spending and take care of those entitlement programs he has told Congress are broken and need fixing. He knows Congress won't listen to his prior warnings. After all, it just passed a spending bill ahead of the holiday that funded things such as a California gay, lesbian, transsexual community center (but California won't allow the Boy Scouts to use some public land) and $75K for the Paper Hall of Fame. Can Congress take on Social Insecurity on its own? Dream on. That is why Greenspan is taking another tact, i.e. threatening rate hikes for other than taking back excess stimulus and quelling some inflation pressure.
IMF lowers outlook for world economic growth. Golly.
That watchdog of world prosperity, the International Monetary Fund, tried with great solemnity to catch the attention of the leading world economies by lowering its 2005 growth expectations to 4% from 4.3%. It cited rising oil prices as one cause, quite understandable if prices do not turn appreciably lower and rather quickly. The other cause was the US deficit. It seems that wherever you turn the US is to blame for the world's problems. Would they be griping if the US has not cut taxes and stimulated a recovery where none would have been? The deficit, despite what those dying to raise taxes believe, would be worse without the tax cuts. Why? The economy would still be in the toilet and the expectations for world growth would be 1% versus 4%.
Moreover, as we have often discussed, we really don't care about deficits, particularly at these levels. The US deficit is right at its average during the past 50 years or so as measured by GDP, the only real way to compare deficits. You can say the deficit is at a record in current dollars, but that simply is not the case. Even if it is higher, history does not bear out those theories of Greenspan, Robert Rueben and their proletariat adhere to. If you look at the facts, interest rates were lower when there were higher deficits and higher when there were surpluses. Interest rates rose as deficits turned into surpluses from the 1980's to the 1990's. This flies in the face of Greenspan's and Reuben's theories about interest rates, but who cares? Facts are facts.
We have said it before: surpluses are not the great panacea they are made out to be. Surpluses mean additional federal spending for one thing on projects such as transsexual community centers and the like (find that one in the Constitution). They also mean that money the economy needs to continue to grow and expand is diverted to government pork and away from the private investments that lead to technological and standard of living gains. Surpluses in fact RAISE interest rates (which is what the facts show) because real dollars the economy needs to expand are scarcer because they are being sucked away by the federal government and spent on projects that do not return any economic benefit. You won't see this anywhere else because it is not something that is easily understood by the person on the street. After all it is easier to relate the federal budget to a household budget; that is nowhere near reality. With Congress wanting all of the money it can suck in, however, it is very easy to propagate this inaccurate analogy, to the detriment of us all in lowered economic output and a standard of living that is not what it could be. The answer is to grow the economy and cut federal spending. In doing so you curtail government growth and the associated waste and allow our free enterprise system to create the goods and services that raise our standard of living.
THE MARKET
Stocks closed mixed on mixed volume. Before you conclude things are pretty mixed up, consider that the market, despite more volatility than it needs, has been consolidating more or less laterally after another strong run. The intraday and day-to-day volatility tells us the market is not as likely to resume a surge higher near term, but the lateral action shows investors still refuse to partake in wholesale dumping of stocks just purchased. We have heard a lot on the financial stations about how it is time to take profits and then thirty seconds later a statement that the market goes up from here so you should be buying. You only get mixed up if you follow that line of thinking.
Again, the action, while not picture perfect, is a lateral consolidation as stocks try to work off the strong run and set up for the next move. The price closes were mixed and volume was mixed. You can read a lot into this but the overall picture is a continued lateral move, trying to consolidate the gains. The volatility and up and down volume are concerns that we continue to monitor, but we also see solid stocks testing near support and rebounding. If the leadership is holding as well we are fairly comfortable with the consolidation, but we want to see it settle down in terms of volume and intraday range.
Market Sentiment
VIX: 12.67; -0.3
VXN: 18.43; -0.34
VXO: 13.08; -0.5
Put/Call Ratio (CBOE): 0.79; +0.06. Rising in a mixed market, showing some concern about the ability to continue the move from here. This is a contrary indicator, and when it rises toward 1.0 on the close it is an indication that uncertainty could be resolved upside. It showed 3 or more closes above 1.0 in October before that move. A showing in the 90's or even a close over 1.0 over the next several sessions could indicate stocks are leaning toward starting another leg higher.
NASDAQ
Tested lower just below the 10 day EMA early in the session and then rebounded to close near the high, volume rising as it moved back up. Still in the recent range and a decent though unspectacular recovery.
Stats: -0.91 points (-0.04%) to close at 2084.28
Volume: 2.093B (+8.32%). Volume was up as NASDAQ turned in a modest loss, technically distribution and can be interpreted as churning as well. It helped that volume rallied as the index recovered in the afternoon session.
Up Volume: 1.169B (-56M)
Down Volume: 896M (+216M)
A/D and Hi/Lo: Advancers led 1.25 to 1. Small and mid-caps helped salvage some decent breadth in a lackluster session, closing mostly flat.
Previous Session: Advancers led 1.45 to 1
New Highs: 168 (+31)
New Lows: 32 (+7)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Closed fractionally lower on the session, rebounding from a test of the 10 day EMA (2073) on some rising volume. NASDAQ has come back to test some support at 2050 and the 18 day EMA (2049) also at that level and has rebounded. It is holding in the range from 2050 to 2100, banging around with some volatility. We want to see it tighten up and then break higher through 2100. This rally tends to surge when unexpected, however. For now we can say it is holding its move while showing more volatility and less solid price/volume action than we would want. That keeps us cautious but seeing no major weakness.
NASDAQ 100 tapped the 10 day EMA and rebounded for a loss, suffering a worse loss than the overall index. An Intel downgrade and some gratuitous other downgrades of chip stocks helped turn the large cap techs lower. No breakdown, however, and a rebound with the rest of the market.
SOX struggled and lagged the rest of the market, but it also once more held support at 425 on the low (426.89) and then closed above the 10 day EMA (428.82). Not bad action with the struggle for the large cap chips. Trying to make a higher low and then take on the 200 day SMA (440.42) once more.
S&P 500/NYSE
Similar to NASDAQ, SP500 tapped at the 10 day EMA and rebounded to close with a modest loss on a slight volume rise.
Stats: +0.01 points (0%) to close at 1176.94
NYSE Volume: 1.426B (+2.57%). Volume rose as the large caps held steady and the small and mid-caps rallied. It remained below average, showing no real conviction either way. Thus no real distribution on SP500 or accumulation on SP600 and SP400.
Up Volume: 782M (-160M)
Down Volume: 621M (+193M)
A/D and Hi/Lo: Advancers led 1.55 to 1. The small caps helped keep breadth decent though hardly strong; better than the indexes finished, however, and that is a good indication.
Previous Session: Advancers led 2.18 to 1
New Highs: 291 (+90)
New Lows: 6 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Very similar to NASDAQ, testing the 10 day EMA (1173) on the low and rebounding for a modest loss on rising trade. NYSE trade was still easily below average, however, so no real conviction in the selling or the rebound. SP500 is holding above that second double top peak from early 2000, an important support level the index is trying to hold. Still very volatile action between 1170 and 1180. Looking for it to calm some in this range to best set up the next move, but its ability to hold above 1175 fairly consistently also keeps us ready for another leg higher.
New all-time high for SP600 as the small caps and mid-caps led the market yet again. After a week long lateral move this breakout was not as strong as we wanted but good to see leadership in this market.
DJ30
Another index that tested the 10 day EMA (10,463) once more and then rebounded to close basically flat. Volume edged higher here as well though it too was below average on the close. After tapping 10,600 last week DJ30 has struggled but it has managed to hold near support at the 10 day EMA. That leaves NASDAQ, SP500 and DJ30 all testing the 10 day EMA, all a bit volatile, but all holding their gains fairly well.
Stats: +3.18 points (+0.03%) to close at 10492.6
Volume: 254 million shares Tuesday versus 240 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The remaining economic data for the week all gets pushed into Wednesday. Durable goods orders, final Michigan sentiment, jobless claims, and new home sales. Lots of data but not likely a lot of response from investors. Durable goods and Michigan sentiment could have the most impact as people tend to get excited about how the consumer feels though actions rarely track the reports. Thus we look more to what the market has shown us lately.
It is the day before Thanksgiving, and volume is typically lower and prices are typically decent on the upside. That is particularly true in a continuing uptrend. The market is in an uptrend, but right now it is consolidating its strong move, so the Thanksgiving rally has had a hard time getting its footing. Good intraday action, i.e. closing near the session high as stocks come back late, but still volatile with shaky price/volume action.
Volume Tuesday was somewhat surprising, and it will be more surprising if it continues higher Wednesday. About noon eastern time we can expect most managers to leave if not before. That makes it hard to gauge the overall action, and that mostly impacts new positions as they can rise in a holiday move but not have the volume behind them. The problem with that is that once all investors are back they may give the thumbs down to the move and overwhelm a light volume holiday bounce.
Thus we will be selective in what we add on Wednesday, looking for some good trade volume on stocks we are considering adding either new or additional positions. We would like to see a holiday melt higher to end the week, adjust our stops higher, and then see what next week brings when managers return.
Support and Resistance
NASDAQ: Closed at 2084.28
Resistance:
Price resistance at 2090.
Some resistance at 2100.
January high at 2154
Support:
The April high at 2079
The 10 day EMA at 2073
2050, prior resistance, provided some support Monday
The 18 day EMA at 2049
Some price points at 2000.
October high at 1971
The 50 day EMA at 1986
The 200 day SMA at 1953
S&P 500: Closed at 1176.94
Resistance:
1175 second high in that double top that spanned late 2001.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 10 day EMA at 1173.25
The 18 day EMA at 1163.92
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 1140.99
Dow: Closed at 10, 492.60
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 10,463
The 18 day EMA at 10,381
September high at 10,342
The 200 day SMA at 10,244
The 50 day EMA at 10,235
The February/June 2004 down trendline at 10,175
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 actual versus 6.75M expected and 6.76M prior (revised from 6.75M)
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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trading system
option trading
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