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world stock market, us stock market
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12/01/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: SIMG
Buy alerts issued: STK; SLR; QSFT; CME
Trailing stops issued: None issued
Stop alerts issued: None issued
SUMMARY:
- NASDAQ and SP500 break through near resistance on strong volume.
- Personal income and spending beat expectations.
- ISM posts solid gain.
- Oil tanks on inventories.
- Stocks meet Tuesday distribution with strong buying, breakout of range.
- Market move is in anticipation of better economic data and times.
Market can't wait, surges out of the range on volume.
As much as the market appeared to need more rest with its continued intraday volatility and bouts of distribution, we noted that there was getting to be enough pessimism about the longevity of the rally for stocks to pull what they have pulled all rally, i.e., surging just when you were ready to stick a fork in them. Wednesday futures started solidly higher, and the economic news did not hurt with solid personal income and spending, excellent manufacturing growth, and oil collapsing below the 50 day EMA. The combination of news added fuel to stocks that seemed bent upon rallying even before the news hit.
SP500 and NASDAQ both broke out of their recent ranges on strong volume as the small and mid-caps led to new all time highs. Even SOX regained its 200 day SMA. Breadth was strong, volume was high, resistance was cleared; that is the kind of strength you like to see as a new leg to a rally kicks off.
THE ECONOMY
The economic data did not start the Wednesday move, but it certainly did not hurt. Indeed, when oil started its plunge after the API and EIA data, stocks started higher. It was a synergistic affect from the economic data: personal income was solid and spending was even stronger. This was even with the lower consumer sentiment (you see, we said it meant nothing at these levels) and energy prices still high. If consumers are still spending even with higher prices, that is a positive for one of the economic engines. Moreover, it wasn't just spending on higher energy costs that boosted spending; real disposable income has risen the past two months despite rising energy prices. That is the money you can make choices on what to spend on other than the necessities. It is rising even with higher energy prices, and that is very positive and the market picked up on that.
Personal income and spending rise.
Incomes rose 0.6% (0.5% expected) and spending rose 0.7% (0.4% expected). You like to see both rising because more income means more money to spend, and more spending means consumers have no problem parting with the extra money.
Now that last comment always gets economists (at least most of them) and others that have a one-dimensional view of the economy worried. They claim the savings rate is too low, that foreign investors will lose confidence in the US, etc. What this calculation fails to consider is the change in the consumer/saver. Back when interest rates were 14% on short term CD's it was pretty easy to put the money in and earn interest income, though the inflation rate was so high the return was mostly if not totally eaten away. Now we have comparatively negligible inflation and extremely low yields on interest investments. Savers have shifted more assets from savings accounts to other forms of savings, e.g., stocks, bonds, commodities, etc. that provide better returns. Despite the 2000-2001 crash, the US populace has maintained the shift into riskier assets as part of their savings. The problem is now as it was when it started, i.e. the government does not recognize this.
Good or bad? It gives a paternalistic federal government and those in Congress without a clue as to real world economics something to worry about and something to demand more money to spend so as to study and provide solutions to all of us misguided, ignorant slobs that go to work every day to pay for Congress' salaries and perks. To us it simply means that more people have faith in the industry and inventiveness of the US in that they are willing to invest in America for their future. Indeed, despite all of the blathering over the federal deficit (as if it was analogous to a household or business deficit), the trade gap, and the weaker dollar, US citizens as well as foreign citizens and banks are willing to put invest more money into the US. With the US conservatively expected to grow at 3.6% GDP through 2006 versus EU expectations of 2% and a 'recovered' Japan at 2.8%, US investment looks a whole lot more promising.
Oil prices tank as US inventory data looks to be the straw that broke the trend.
As noted, a real plus seen the past two months is the increase in disposable income despite surging energy prices that, after falling, rebounded to test the fall. Oil prices have basically doubled in a year, yet the economy continues to grow, the market continues to rise, and consumer and business spending continues to surge. We will discuss those other points at a later time, but it is key how oil is reacting right now. It looks as if it can only get better for the economy near term.
What has happened with oil? Two to three weeks back oil started peaking out, and then suffered some sharp distribution. It broke through the 50 day EMA during that volatility. Over the past week or so oil has worked its way back up, approaching $50/bbl once more. With oil supplies continuing to build all the while, this move was very much the same as a stock rebounding on lower volume to try resistance once more. Three out of four times this move fails, giving the so-called 'kiss goodbye' before the real selling starts.
When the oil inventory data hit Wednesday with crude levels up 900K bbl (200K bbl expected), distillates up 2.3M bbl (1.4M expected), and gasoline up 3M bbl (1.1M expected), oil futures plunged. These were solid gains across the board that proved the higher production levels are resulting in sharply rising inventories. They sent oil below $46/bbl, a $3.20/bbl drop and the largest drop since September 2001. After a test of a breakdown below a key trendline, the real selling starts.
Ultimately we expect to see oil back in the $30/bbl to $35/bbl range during this retrenchment. After some initial sharp drops it will most likely work trend toward those levels over the winter with the usual up and down action that occurs in any trend. Unless some unforeseen forces emerge we are looking for oil prices the world economies can better handle. Indeed, it appears the market is anticipating such.
National manufacturing posts another gain.
ISM came in at 57.8, better than both the 57 expected and the 56.8 from October. That is the 18 month of expansion, and reverses a three month trend of lower ISM readings. We remember back when we were looking for signs of expansion, and now there is a year and one-half under the belt. Even with that, traditional jobs have been hard to come by as businesses are still using productivity enhancing equipment and foreign workers to help boost profits and better compete globally.
That is why this report was even more encouraging than many solid reports in the past. New orders rose to over 60. Employment rose to 57.6 from 54.8. Prices paid were positive as well, showing a decline even as the overall index picked up speed. All positive developments from this more forward looking economic indicator.
THE MARKET
Stocks started strong, took a midday breather, and finished pretty strong as well, holding the gains into the close. Volume was up, breadth was solid, the trading range was broken to the upside. It was the start of the month and new money was put to work, but Tuesday was also the end of the month and money was shifted around. Tuesday was distributive, Wednesday was an even stronger accumulation session with volume surging and a range breakout. That is pretty potent action.
You love to see distribution met with stronger accumulation when you are playing the upside. How many times during the downtrend did you see some apparent accumulation met the next session with even stronger selling? Almost regularly until the downtrend was broken. This action in reverse is a very strong bullish signal. A strong breakout from a trading range is always nice, and when it shows a sort of 'in your face' response to some distribution, all the better.
Market Sentiment
VIX: 12.97; -0.27
VXN: 18.24; -0.6
VXO: 13.46; -0.08
Put/Call Ratio (CBOE): 0.73; -0.16
NASDAQ
Broke out of the two week trading range on the strongest volume of the rally, a very good indication for the start of the new leg higher.
Stats: +41.42 points (+1.98%) to close at 2138.23
Volume: 2.327B (+21.87%). An appropriate level of volume, the highest since June, to start the next leg of the rally. Strong surge that overwhelmed the prior session's distribution.
Up Volume: 1.939B (+1.1B)
Down Volume: 352M (-693M)
A/D and Hi/Lo: Advancers led 2.08 to 1. Very solid though not blowout breadth.
Previous Session: Decliners led 1.21 to 1
New Highs: 329 (+127). Good increase in new highs gives some substance to the breakout from the range.
New Lows: 21 (+9)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ did not need any more time to set up the handle to its 11 month base. It broke out Wednesday on strong trade, rallying to close at the session high. When you look at the big picture you see the cup with handle or double bottom with handle, and now the breakout. After the 2003 rally and the initiation of the Fed rate hikes, it took a big base to consolidate. Despite the headwinds the economy has continued to grow. After stocks based out, they are breaking out and propelling the index higher as well.
NASDAQ 100 broke to a new multiyear high, and it did so with style. Lots of room to run up to 1734, the top of the late December 2001/early 2002 double top.
SOX rejoined the party Wednesday, rallying back through the 200 day SMA (438.26) on the close. Good solid volume moves peppered chip stocks as they provided some important gains in the technology indexes.
S&P 500/NYSE
High volume breakout from the trading range to a new 2004 and multiyear high. Solid breakout.
Stats: +17.55 points (+1.5%) to close at 1191.37
NYSE Volume: 1.784B (+14.76%). Excellent volume surge as SP500 and SP600 broke out to new highs. As with NASDAQ, a good response to the Tuesday higher volume selling.
Up Volume: 1.392B (+742M)
Down Volume: 368M (-511M)
A/D and Hi/Lo: Advancers led 2.28 to 1. Decent, not blowout, breadth as the large and small caps hit new highs.
Previous Session: Decliners led 1.37 to 1
New Highs: 486 (+203). Good showing of new highs.
New Lows: 3 (-8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The consolidation of the November breakout was successful. Large cap stocks held their gains in an volatile lateral move, but one that held over the 18 day EMA the entire consolidation. Holding the gains is a sign of strength, and of course the volume breakout Wednesday is the ultimate vindication of that strength.
The small caps and mid-caps surged to new all-time highs. They are looking very spry for indexes and stocks that were at the end of their run a year ago. They are one of the leaders in the market, and they are indications of continued economic expansion. The small caps tend to enjoy the best growth early in a move and are ultimately replaced by the larger caps. If you subscribe to that theory you would conclude that there is still a lot of upside left in this rally that started in October 2002.
DJ30
The blue chips shot higher on volume Wednesday, coming off the 18 day EMA with vigor. Maybe trash talking the index Tuesday fired it up. More like a lot of money moving into these stocks just as it did across the market. Unlike the other indexes, DJ30 did not clear the highs in the recent range, closing just shy of 10,600, the level the index hit two weeks back and pushed it back down. Looks ready for a breakout. Despite the move, it is still a follower, not a leader.
Stats: +162.2 points (+1.56%) to close at 10590.22
Volume: 308 million shares Wednesday versus 287 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Something of a lull in the economic data tomorrow with weekly jobless claims and factory orders ahead of the Friday jobs report that typically gets most of the attention even though it is a lagging indicator. A strong report, however, will make pundits, retailers, politicians, and the like happy. Ahead of Christmas that is not a bad thing to see.
With such a strong move Wednesday the response can be varied. Sometimes you see an immediate test, other times the rally continues higher for a few sessions before testing. Often it has to do with the strength of the move. The indicia of strength was overall solid with strong price/volume action and leadership, but breadth was borderline at just 2:1. We are not suggesting the move will fail, but just gauging how sharp the leg will be. This rally has typically shown three or so sharp upside sessions as it begins a new leg higher.
We have been adding positions when they showed the move before today, and we were doing the same Wednesday as stocks shot higher. We are enjoying strong runs in many continuing positions, positions we will be happy to let run for years if they will continue their leadership (option gains, of course, will be taken at optimal times). We are never in a hurry to cut a winner though when we conduct our weekly reviews of trades and plays we still see instances where we succumb to impatience and are shaken out. With so many stocks moving well you tend to get antsy, though you should cull laggards that don't move with the market.
Thursday we will continue to look for more stocks providing good entry opportunities as the rally tries to continue. While the economy was bad mouthed non-stop during the election campaign (still remember one commentator saying the economy was in 'tatters'), the recent data shows no sign of letting up, and a slower 2005 does not seem so certain now. And of course the market has, as typical, rallied ahead of the release of the reports showing that renewed strength. It appears not only that it is anticipating a good employment report Friday (the weekly jobless claim trend is very positive), but well beyond that. The growth indicators we watch have continued to strengthen impressively, and if there is real movement on social security and tax reform, we could see even more upside built in.
Some studies indicate that a flat tax system of some sort would set off a 10 year investment boom in the US that would blast the financial markets higher, raise productivity, and enhance our standard of living dramatically. Compliance costs with the current code run in the hundreds of billions per year, and that does not count the IRS bureaucracy and its enforcement procedures that cost taxpayer money as well. Private social security accounts would be a boon for financial markets as well as more money is put to work as it is invested in the US economy. The one-two punch from these reforms would unleash a tremendous, tremendous amount of capital into the economy. That investment would have so many benefits from higher standards of living to increased tax revenues due to increased economic activity, that the transition costs so many fear would be laughable after the fact. The hardest thing about change is the fear. Hopefully we will have the courage to move forward.
The market is not factoring this in yet, but as it starts to take shape and gets momentum in Congress, the closer it comes to reality, we will start seeing the results being built into the market. For now we are playing the current rally as we can only invest according to what the market tells us. Wednesday it was telling us to continue buying into the move.
Support and Resistance
NASDAQ: Closed at 2138.23
Resistance:
January high at 2154
2250 from 2001 highs and lows.
Support:
2110 - 2112, the top of the November consolidation.
The 10 day EMA at 2098
Price support at 2090.
The 18 day EMA at 2076
The April high at 2079
2050, prior resistance and the June high.
The 50 day EMA at 2008
October high at 1971
S&P 500: Closed at 1191.37
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1180 to 1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001 is trying to hold.
The 18 day EMA at 1171
January highs at 1158
The 50 day EMA at 1148
1142-1146 are the June highs and the October high (1142).
1128 to 1125 the September closing high.
Dow: Closed at 10, 590.22
Resistance:
Price consolidation at 10,600 level
10,747 is the February high
Support:
10,570 is the early April high
The late April, June peaks at 10,478 to 10,512
The 18 day EMA at 10,436
September high at 10,342
The 50 day EMA at 10,284
The 200 day SMA at 10,240
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): 0.6% actual versus 0.5% expected and 0.2% prior
Personal Spending, October (8:30): 0.7% actual versus 0.4% expected and 0.6% prior
Construction Spending, October (10:00): 0.0% actual versus 0.7% expected and 0.1% prior
ISM Index, November (10:00): 57.8 actual versus 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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world stock market
us stock market
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