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trading system, money investment
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11/30/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: ENER
Buy alerts issued: INFY; STGS; PLAB (bonus)
Trailing stops issued: DHB; JNPR; GPN; DHR
Stop alerts issued: TBL
SUMMARY:
- Stocks ignore good economic data, continue in the lateral consolidation.
- Q3 GDP excellent as consumers, businesses spend.
- Chicago manufacturing remains very strong.
- Consumer fretting over gasoline, heating oil.
- Distribution creeps into the market again as near resistance stalls stocks once more.
Volatile session closes month on a down note.
Another session, same story. Stocks were volatile all session but within a relatively narrow range, well contained within the current lateral move. There was strong economic data with Q3 GDP revised up to 3.9% and Chicago PMI continuing its strong run. Confidence missed by a wide margin, but investors bought stocks on that news, favoring the positives the Chicago PMI showed.
That was not enough, however, as the indexes rallied to near resistance and failed. That set up the action, another series of up and down moves within the range between near resistance and near support just as we have seen the past week. Unlike prior sessions, stocks failed in a last hour rally attempt, rolling over and closing at session lows. Volume ratcheted up in that last hour as the end of month positioning took over, marking distribution sessions on NASDAQ, SP500, and DJ30. Again, volume rushed in late, indicating end of month shuffling, but we don't want to ignore the two distribution sessions the large cap indexes have shown the past 10 trading days. They can be explained away as expiration and end of month positioning, but we have to keep watching.
Overall the indexes remain in their lateral consolidation of the October to November surge with most stocks holding up. Given the higher volume, we still were ready to close positions breaking near support out of an abundance of caution, but the majority of stocks continue to hold support as they move in their own pullbacks to test their recent moves as well. Stocks are setting up for another push higher toward year end as they trade between near support and near resistance. The volatility and up and down volume indicate the fight between bulls and bears still rages, and that will need to be resolved before the move resumes. Typically you see volume drop and the intraday trading range narrows and calms down before the breakout occurs. That tells us there is still some more work to be done overall even though we saw some stocks breaking higher once more, going about their business on their own timetable as strong stocks tend to do.
THE ECONOMY
Q3 GDP revised to 3.9% despite falling inventories.
It was nice to see GDP revised closer to that 4% level anticipated, and with another iteration to go, we could easily see it top that mark, particularly given the strength in the numbers continues to improve. Hardly the stampede higher seen in 2003 when all the tax incentives were in full force, but very solid growth. Indeed, it was the six straight quarter with growth in excess of 3%; solid, steady growth.
Moreover, the details of the report show only positives in the future. Inventories were lower, and that lowered overall GDP as inventories are part of production. Consumer consumption surged to a 5.1% annual rate, swamping the 1.6% rate posted in Q2. That was the strongest surge since a 7% spurt in Q4 2001. Business spending was even stronger. Spending on equipment jumped 17.5% from a strong 16.9% as businesses continue to use the investment incentives set to expire at year end. Moreover, the lower inventories and higher consumption indicates more production necessary to satisfy demand. That means a strong Q4, made even stronger as more businesses rush to take advantage of the final portion of those tax incentives.
While this is good from a growth standpoint we also have to be concerned about inflation. Low inventories and higher demand put pressure on prices. All during this recovery supply has lagged demand. One of the main reasons was the incentives first passed were demand oriented as certain blocks in Congress tried to pigeon-hole the recession with the majority of recessions where consumer demand falls off sharply and then helps revive the economy with a burst of buying. That did not happen here; demand remained uncannily solid throughout. These blocks would not vote for a tax package, however, without a lot of demand side stimulus. Thus when the rebates and other demand side policies hit, already solid demand shot higher. It was not until the supply side incentives hit in the second and third round of tax cuts that the business or supply side started to ramp up. It has lagged all along, however.
It is a simple matter of supply and demand, and demand has been ahead of supply all along. That is what has caused the potential problems with inflation, something not encountered in the 1980's recovery where supply side incentives were initiated from the start, giving the supply side the head start on demand. That is why we continue to advocate policies that will encourage further investment in the US so the manufacturing and service machine can get out ahead of demand. We still see reluctance in hiring and capital expansion even with the improving numbers. Everyone is quick to point out the lag in traditional hiring in this recovery and say the tax cuts did not work. As we noted at the time, the only problem was they did not go as far as the Reagan tax incentives in 1981. If they had, and if they had done so from the start, hiring would have been on the rise much earlier.
Chicago PMI backs off record pace, but is still very strong.
The 65.2 November reading was lower than the record 68.5 in October, but easily topped the 62.0 expected. Strong numbers across the sub-indexes, and that has the good mixed with the bad. Prices paid hit a 24 year high at 89.8. Production was a strong 68.4. New orders at 70, while off the 79 from October, were still strong. Employment rose to 60.8, the fourth straight month of consecutive expansion, and the highest level in 16 years. Even with higher prices, historically a rise in the Chicago prices paid has not translated into a rise in consumer prices.
These are strong numbers and are often a harbinger of the national manufacturing report. The ISM will be released Wednesday and we will see if these results translate into national gains as well. The pricing remains a concern as noted above as demand has exceeded supply all along.
Consumer Confidence lags expectations but at these levels it does not matter.
You will note that confidence is our third headline under economic news, unlike most news outlets. They are transfixed on the consumer much as Congress was in the first tax cuts. Confidence fell to 90.5 from 92.9, and well below the 96.0 expected. According to the Conference Board it has to do with energy prices as opposed to jobs or anything else. That is fine and dandy. As we saw last weekend, that was not bothering consumers as they went out and shopped hard. Again, WMT did not enjoy the gain, but times are better and WMT is not the default shopping stop it was during the recession and immediately following 9-11. Moreover we hear that WMT was outmaneuvered by its competitors that offered price reductions where WMT kept prices pretty much steady. This happened last year and we noted that WMT was getting beaten at its own game. It is happening again this year, and now WMT is announcing it is going to lower prices, obviously attempting to lure back its customers.
At these levels this is all just a bunch of fodder for talk shows. We have stated before that history should be your guide, and that is particularly true with confidence. Consumers really do not start holing up and hunkering down until confidence gets in the fifties. Recall that when Bush I lost his re-election bid confidence was in the fifties; same with Carter. At that level there is really a worry because consumers bottle up and stop spending. Even though confidence has dropped four consecutive months, it is still in the nineties. Historically that is no problem.
THE MARKET
Once more stocks tried near resistance and were again rebuffed. They fell but they also managed to hold near support as well, continuing their lateral move in the 2 week consolidation. It has not been a nice, tight, no worries move as seen in early November. Stocks have been quite volatile, though within a relatively narrow range, as they make this choppy consolidation. There has been some higher volume down sessions and stocks have bounced up and down intraday, both indicating that the bulls and bears are still fighting it out with no one taking the upper hand just yet.
The distribution suggests some weakening of the move though it is not yet at the level that would indicate a sell off ahead. This market needed a longer rest after that strong surge, and it is getting it. Though stocks closed on their lows Tuesday, overall there remains a bullish bias in the market. This consolidation (you can't call it a correction) along with the dollar and the deficits is making enough people nervous to send the market back up. This rally has rallied when it appeared it should have been selling. It finally convinced everyone it was for real and then it actually moved into the current stall phase. Now that enough are starting to doubt it, we could see it start right back up.
Market Sentiment
VIX: 13.24; -0.06. Volatility could spike up a bit here and help get a move started. Back in late October when the last leg higher started, VIX hit near 17. A rise in volatility would add more weight to the argument the current move was setting up a new leg higher.
VXN: 18.84; +0.01
VXO: 13.54; +0.08
Put/Call Ratio (CBOE): 0.89; +0.15. Nice jump once more in the put/call ratio, getting nearer that 1.0 level on the close that often indicates a rebound is ahead.
NASDAQ
Sold off on the session on higher volume, but the current move is forming a handle to its 11 month base. It will have to settle down a bit more, but it is setting up for another move.
Stats: -10.06 points (-0.48%) to close at 2096.81
Volume: 1.909B (+2.89%). A jump in volume at month's end kept trade above average. With the pullback in price, it was a distribution session, the third in the past 10 sessions. Two can be explained as expiration and the end of November, but you don't want to rationalize away higher volume selling. Much better to remain diligent.
Up Volume: 839M (-297M)
Down Volume: 1.045B (+356M)
A/D and Hi/Lo: Decliners led 1.21 to 1. Very modest breadth decline, indicating NASDAQ is still in solid shape.
Previous Session: Advancers led 1.33 to 1
New Highs: 202 (-74)
New Lows: 12 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Sluggish all session, ending the day at the lows on rising volume. Even with the selling, techs held easily above the 10 day EMA (2089) and well above the low in this consolidation at 2050. The 10 day EMA may not hold, but with the 18 day EMA (2068) and the bottom of the range at 2050 (also the highs of the early November lateral consolidation), NASDAQ remains in good shape as it sets up the next move higher.
Large cap NASDAQ 100 fell back toward the 10 day EMA (1566) as well, closing above that level and still easily in the consolidation range despite the distribution. We note that QQQ slid back to the 10 day EMA on lower, below average volume.
SOX looked pretty good but Tuesday slipped below the 18 day EMA and support at 425 on the close. Not showing the strength we wanted to see as the lateral move continued. Could be a shakeout, but we would want to see it recover quickly and take another shot at the 200 day SMA (438.64). We note that some of this selling was due to announced changes in the index; those leaving the index were sold off, and that put pressure on the rest of the index.
S&P 500/NYSE
Gapped lower and never really challenged resistance at 1180 to 1185. Volume was up but it is holding its near support as it continues the lateral move.
Stats: -4.75 points (-0.40%) to close at 1173.82
NYSE Volume: 1.555B (+13.09%). Rising volume on the selling as trade surged in the last hour as stocks sold off. That is selling volume and technically distribution, the third session in the past 12 sessions, but one of those sessions was questionable, and indeed the others were on expiration and Tuesday's month end. We won't totally discount them, but we are not overly concerned at this point.
Up Volume: 650M (+78M)
Down Volume: 879M (+88M)
A/D and Hi/Lo: Decliners led 1.37 to 1. Just about where it was Monday, and with the small caps coming under some pressure as well, not a bad showing.
Previous Session: Decliners led 1.31 to 1
New Highs: 283 (-117)
New Lows: 11 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 slipped through 1175 by a hair, the second top in the early 2002 double top. An appropriate level to consolidate after a strong move off the October low and a break to a new 2004 high. Watching the distribution, and want to see SP500 hold near the 18 day EMA (1169) and the volatile intraday range calm down as it does. That is the best indication that the consolidation is running its course.
Small caps could not continue the string of new closing highs, easing back a half point on the close. A tremendous run still in place as small caps just take a modest day off as they continue to hold well above the 10 day EMA. They are leading higher while the rest of the market takes a breather, an indication that the overall market will rise as well after this consolidation. Most likely we will see money rotate when that happens, some of it coming out of the small caps that moved up while the rest of the market moved laterally .
DJ30
Distributed as well with volume spiking above average as the blue chips sold down to the 18 day EMA (10,417) after tapping that level Monday and rebounding to close. It is still within its range as well, but unlike NASDAQ, it is at the bottom of its range, needing to hold near 10,400 to maintain the move. We do note that DJ30 has not been a leader either way during the rally. It made a new low for 2004 just as the other indexes started to rally, and it could break lower while the other indexes hold their ranges. Gee, we have pretty much emasculated DJ30 in terms of any leadership capability. Sorry guys.
Stats: -47.88 points (-0.46%) to close at 10428.02
Volume: 287 million shares Tuesday versus 247 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The economic hit parade continues Wednesday with personal income, personal spending, and ISM leading the pack in terms of importance. Auto sales are expected to be lower and inventories thus higher. We already see the Lexus bow commercials running; maybe the deals will be good enough to put a car under the tree if inventories jump. More than likely it would be a domestic vehicle, however, if the criteria is getting the best deal.
Most will look at personal income and spending, no doubt important, but we will be more interested in the ISM and its sub-indexes to see just how strong the manufacturing side is. This is a proxy for some business spending/sentiment, and for the reasons outlined above with respect to inflation, we want to see it surging. The economy needs the supply side really humming along to put off inflationary effects of strong demand and relatively loose money from the Fed.
The latter is a real concern. The Fed made the same mistake in 1999 when it flooded the economy with money ahead of Y2K even as it raised rates. The Fed has a tough time ahead trying to keep demand up and investment growing while trying to quell the inflationary pressures from a supply side lagging demand and a falling dollar that makes goods more expensive. As always, the way out is economic growth. We have to continue and enact policies that will enhance growth and trim spending. We should not let short term costs associated with fixes to social security and the tax system cloud the long term value of those changes.
That is a bit beyond the bounds of the action Wednesday, however. Given the volatility and the distribution, it does not appear the market is ready to resume the break higher. As noted, however, many are starting to doubt the move, and disbelief has been the catalyst to start the market higher during this run. We are guarding current positions given the distribution we were seeing; that is just something you have to do. We are still looking at several stocks that are holding near support and preparing to continue their moves. Many of our current plays fall into that category. We are looking for nice, orderly tests to near support; as the market overall is rather wild, those stocks exhibiting the calm and orderly testing are most likely going to make the first jumps as they are further advanced than the overall market.
Support and Resistance
NASDAQ: Closed at 2096.81
Resistance:
Some recent resistance at 2110 - 2112.
January high at 2154
Support:
Price support at 2090.
The 10 day EMA at 2089
The April high at 2079
The 18 day EMA at 2068
2050, prior resistance, provided some support Monday
Some price points at 2000.
October high at 1971
The 50 day EMA at 2003
The 200 day SMA at 1954
S&P 500: Closed at 1173.82
Resistance:
Some resistance at 1180 to 1185 (recent high)
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 is trying to hold.
The 18 day EMA at 1169.26
January highs at 1158
1142-1146 are the June highs and the October high (1142).
The 50 day EMA at 1146.61
1128 to 1125 the September closing high.
Dow: Closed at 10, 428.02
Resistance:
Broke the 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 18 day EMA at 10,417
September high at 10,342
The 50 day EMA at 10,272
The 200 day SMA at 10,240
9980 to 10,000.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 30
GDP-Prelim., Q3 (8:30): 3.9% actual versus 3.7% expected and 3.7% prior
Chain Deflator-Prelim., Q3 (8:30): 1.3% actual versus 1.3% expected and 1.3% prior
Consumer Confidence, November (10:00): 90.5 actual versus 96.0 expected and 92.9 prior (revised from 92.8)
Chicago PMI, November (10:00): 65.2 actual versus 62.0 expected and 68.5 prior
December 01
Auto Sales, November: 5.1M expected and 5.1M prior
Truck Sales, November: 8.1M expected and 8.1M prior
Personal Income, October (8:30): 0.5% expected and 0.2% prior
Personal Spending, October (8:30): 0.4% expected and 0.6% prior
Construction Spending, October (10:00): 0.7% expected and 0.0% prior
ISM Index, November (10:00): 57.0 expected and 56.8 prior
December 02
Initial Jobless Claims, 11/27 (8:30): 330K expected and 323K prior
Factory Orders, October (10:00): 0.2% expected and -0.4% prior
December 03
Non-farm Payrolls, November (8:30): 200K expected and 337K prior
Unemployment Rate, November (8:30): 5.4% expected and 5.5% prior
Hourly Earnings, November (8:30): 0.3% expected and 0.3% prior
Average Workweek, November (8:30): 33.8 expected and 33.8 prior
ISM Services, November (10:00): 58.5 expected and 59.8 prior
End part 1 of 3
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trading system
money investment
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