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world stock market, us stock market
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12/07/04 Investment House Daily
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SUMMARY:
- Stocks try a morning rally but then reverse on volume.
- Productivity slips in below expectations though still strong.
- Challenger layoffs top 100K for third straight month.
- Stocks back in the recent range as market gives back last Wednesday rally on volume.
- TXN update narrows range but lowers the high end as well.
- Subscriber Questions
Morning rally attempt gives way to volume selling.
NASDAQ had tried to lead higher after the last Wednesday breakout from the trading range, but nobody was following. SP500 looked as if it was resting, setting up for the next move as well while the small caps took a breather at the 10 day EMA. We noted that the others needed to start to follow or NASDAQ would have to take a break as well.
NASDAQ tried one more time to lead, breaking back through the top of the current base (2154) with some big name networkers leading higher in the morning, and moving on good volume. Once more, however, no one was following. Over lunch the bids dried up. Sellers seized the opportunity and started selling stocks. Volume rose into the selling, indicating the bigger money was unloading stocks bought in the rally that started in October. One day of volume selling does not wreck a rally, but this was some massive volume on NASDAQ, the strongest in over a year. You have to take notice of that.
There was no specific story that triggered the reversal. The Wall Street Journal had issued a story about the rating of US bonds and whether there was a chance their rating could be lowered that some floor traders credited with the reversal. Others still talked of the dollar/deficit/trade gap issues (those are supposedly tied to the bond rating issue) while others said it was time for profit taking. The WSJ story was out before the open and stocks rallied early in spite of it. Profit taking occurs on lower volume.
The selling was brought on by various factors, but regardless of the cause, it was volume selling. The small caps broke through the 18 day EMA while the other indexes gave up last Wednesday's move. When the smoke cleared they had sold back into the range on rising volume. They may hold here and base some more, but they made a further upside move much more difficult near term. After several attempts by NASDAQ to break through the 2004 base, it was roughed up. Stocks are still at near support for the most part, but they will have to prove they are ready to move higher. We will be playing some defense with present positions until we see stocks are ready to hold the consolidation/near support and deliver another break higher.
THE ECONOMY
Oil tanks but does not help stocks.
Oil and stocks have been moving somewhat inversely for much of the year. Tuesday that was not apparent, however, as oil fell below $43/bbl in another hard drop as stocks fell hard as well. Nonetheless, continually falling oil prices are ultimately good for the stock market because it reduces costs to consumers and businesses, allowing more consumption in other areas as well as lessens the inflationary pressures caused by true demand for oil. A drop below $40/bbl will be a big psychological boost for businesses, consumers, etc. Gasoline prices are already down 11 cents nationally and still falling. Nothing but good news.
It is interesting to note that oil continues to fall even with the new Spain bombings and the attack on the US consulate in Saudi Arabia. The terror premium was part of the run up in oil prices, and with the lack of response (a modest bump Monday) shows the terror premium is being pumped out of the price per barrel.
As reported Monday, OPEC wants to keep prices at $40/bbl. Before the hype and speculation drove prices to $50/bbl, OPEC could not keep prices propped up even with China's surging economy. As is typical after a frothy and breathless run, prices tend to deflate rapidly as the non-demand related, emotional aspects of the price run are removed. Oil broke the 50 day EMA, tested it, and then flopped. It is still flopping. Again, OPEC's grip on world price has been weakened the past few years, and we expect to see prices below $40/bbl if that is the floor OPEC wants to set. $35 - $36/bbl is where we see it in the not too distant future.
Challenger jobs survey shows another 100K+ layoff month as productivity remains strong.
November cuts at 104K, the first 3-month 100K layoff spree since April 2002. Challenger blamed it on higher healthcare costs and energy costs as companies try to contain these expenses. As far as healthcare, the answer will have to be weaning people off of the 'insurance will pay for it' mentality that drives a lot of unnecessary procedures and prescriptions. Expanding health savings accounts (HSA) is a way to put the decision making back in the hands of the consumer and at the same time require some sober assessment of what is necessary and what is done just because 'insurance will pay for it.' That mindset is so engrained in the current healthcare system that it will take time, but it is worth it.
Despite the triple header of 100K layoffs, job losses were still down 19% for the same period in 2003. Small consolation, but it does show improvement. Economists lamented the deficit of jobs compared to recoveries past, but with productivity still at high levels (1.9% gain in Q3), the economy is still able to use current workers, indeed even less workers, and still produce adequate goods to meet the demand level.
We will take more flack for this, but these jobs surveys also do not account for the rise of the self employed and small businesses. We note that personal bankruptcies have dropped sharply even as job creation supposedly lags. Falling bankruptcy rates do not corroborate the idea of a desperate, strapped employee class. Further, the employment rate for November fell 0.1% (5.4%) even as traditional non-farm jobs drifted in at a modest 112K. That 'household survey' as it is called showed in increase of 483K jobs during the month. This kind of recovery breeds different kinds of job creation. Not everyone starts their own business, but in a free enterprise system, need creates results.
THE MARKET
Not a pretty session. There were leaders moving higher Monday, an indication that the rest of the market would follow once this breather was over. Instead, there were leaders moving lower Tuesday after the early rally folded over lunch and the sellers decided the time was ripe. Most of the indexes closed back within their recent lateral range, at least those that had a lateral range. SP600, the small cap index, had rallied while the rest of the market meandered sideways; it thus appeared to take the brunt of the selling as it fell through the 18 day EMA, matching SOX' 2.1% decline. SOX usually leads higher or lower as it is quite volatile. When SP600 leads lower, particularly after it has been a leader for the past two years and more, it is something to take note of.
As noted, it was not a gentle pullback but a high volume affair where NASDAQ sold on the strongest volume in years. Interestingly, NYSE volume, though higher, barely managed to crack average trade. Large cap techs led the selling (just as they have led the recent tech rally), and it was mostly large cap volume fueling the NASDAQ selling. We note that many semiconductor stocks made decent low volume pullbacks while stocks such as CSCO sold on volume. Not many stocks were immune to the selling, but many stocks still managed to hold at near support just as the indexes managed to hold in their recent range.
That provides some breathing room after a day of distribution, but with several tries to break next resistance and then a volume reversal, stocks will have to show us they are ready to make the move back up, i.e., showing some volume coming off support. We still need a NASDAQ breakout (that actually holds) to give the move some serious headway into Christmas, but we are not writing it off after Tuesday.
Market Sentiment
VIX: 13.67; +0.48
VXN: 20.28; +0.75
VXO: 14.18; +0.61
Put/Call Ratio (CBOE): 0.75; 0
NASDAQ
Another attempt to take out the 2004 base in the early morning rally, another failed attempt. This one had more bite, however, pushing NASDAQ lower on a huge volume surge as it moves back toward the late November lateral range.
Stats: -36.59 points (-1.7%) to close at 2114.66
Volume: 2.722B (+26.32%). Explosive volume as NASDAQ reversed a decent upside move and closed at the low. That is the third in the past twelve sessions In addition, there was some churn Friday, a sigh of hot potato with stocks. Still not a lot of heavy selling thus far, more like just a quick, sharp test.
Up Volume: 914M (-535M)
Down Volume: 1.786B (+1.104B)
A/D and Hi/Lo: Decliners led 2.96 to 1. Pretty gnarly negative breadth.
Previous Session: Decliners led 1.25 to 1
New Highs: 108 (-27)
New Lows: 20 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Poor action as an early rally attempt that cracked back over the 2004 high (2154) failed, and failed on a strong volume surge. Large cap techs led the decline, but the 3:1 negative breadth showed the selling was rather indiscriminate. NASDAQ has not totally given up the Wednesday break higher, and it can still find support at the top of that range at 2100 (the 18 day EMA is there as well) and continue the move. It is not uncommon to have a sharp, high volume drop during a continuing uptrend. With most stocks still holding above near support on this decline it remains in the trend. The higher volume selling is a caution flag, but again, the index is still in its uptrend that started off the August low. Poor action Tuesday that will have to show a hold of support at the 18 day EMA (2098).
NASDAQ 100 led the decline but it too is still easily in the uptrend off the August low closing on the low but well above the 18 day EMA (1575).
SOX turned tail at 450 resistance, closing on the low right at the 200 day SMA (436.88). Many of the large cap chip stocks sold back with the market, but did so on continued low volume. This is where it needs to hold for the best upside potential; don't rally want to see a pullback to 425 support again.
S&P 500/NYSE
After three lateral moves the large caps fell back into the range on rising volume but managed to hold the 18 day EMA.
Stats: -13.18 points (-1.11%) to close at 1177.07
NYSE Volume: 1.529B (+13.15%). Unlike NASDAQ, while volume was higher, it barely cracked average on the selling. Distribution, the fourth in the past three weeks, but not a severe case. Given the prior sessions, however, we are watching how the index holds this near support.
Up Volume: 258M (-302M)
Down Volume: 1.26B (+518M). Downside volume crushed the upside. While NASDAQ showed some early buying, the NYSE was weak all the way through.
A/D and Hi/Lo: Decliners led 3.22 to 1. With the small caps plowing through the 18 day EMA, breadth was going to be weak.
Previous Session: Decliners led 1.33 to 1
New Highs: 147 (-87)
New Lows: 37 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Never tried to rally before turning sharply lower to close at the 18 day EMA (1177). It too is still in its uptrend that started at the October low but it is showing hints of forming a broader top here. At this stage it is just a hint as the index is still making higher highs and higher lows. The higher yet relatively miniscule volume compared to NASDAQ is another factor in its favor; the selling was broad, but it was not heavy. It is at a critical level here at the 18 day EMA and the 1175 support that makes up the second top in the early 2002 double top.
SP600 broke through its own 18 day EMA (317.52) for the first time since starting to rally again in earnest in late October. The small caps have led the rally higher, and it is definitely noteworthy that they are fading here and indeed leading downside. Not a great development for the overall market. The other indexes are still within their ranges, but how SP600 responds to support near 300 will be reflected in the other indexes as well.
DJ30
Sharp point loss but the mildest percentage loss of the large averages. DJ30 is ready to threaten the bottom of the recent 3 week range at 10,400, having been unable to breakout over the last high (10,600) before the peak of the 2004 base. Volume was up but still below average as the blue chips rolled down through the 18 day EMA (10,471). It thus remains mired within its 2004 base though no catastrophic move lower Tuesday, at least a move that cannot be further consolidated in the current range for yet another breakout attempt.
Stats: -106.48 points (-1.01%) to close at 10440.58
Volume: 258 million Tuesday versus 218 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
No scheduled economic data for Wednesday, so stocks will be on their own along with bonds, currencies, and commodities (e.g., oil) in defining their worth. The sharp downturn Tuesday and the close on the low suggest downside momentum. With these holiday rallies, we often see some sharp downside sessions that come on quickly and then give way to a continued rally.
Thus we are expecting some more downside Wednesday, but will be watching closely as the indexes test the recent trading range and whether they can hold those levels on the close. Many stocks are selling toward their near term support as well. Often we see an undercut of near support intraday and then a rebound to hold the support on the close. If this selling is of the sharp but short variety, this will be the type of action it exhibits. You always have to approach high volume selling with caution, and if a play is breaking support on volume we typically won't hang around.
We are still anticipating the holiday rally to continue after this pullback. Indeed the breadth readings were so negative and the NASDAQ volume so high it seems that something very aberrant was going on. When something swings that hard to one side it almost begs for a rebound in the opposite direction. We will watch for that, but if a stock sells through support on volume and cannot snap back, we won't wait around for a rebound. No point in having good positions go bad right before Christmas. If they hold and start to rebound at a lower level, great. We will look for the leaders coming back and pick them off as they do.
Support and Resistance
NASDAQ: Closed at 2114.66
Resistance:
January high at 2154 (early 2004 high) stalled the move once more.
2250 from 2001 highs and lows.
Support:
2110 - 2112, the top of the November consolidation.
The 18 day EMA at 2098
Price support at 2090.
The April high at 2079
2050, prior resistance and the June high.
The 50 day EMA at 2027
October high at 1971
S&P 500: Closed at 1177.07
Resistance:
1180 to 1185, the top of the November consolidation range.
1200 is proving to be near resistance.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 18 day EMA at 1177
1175 second high in that double top that spanned late 2001 is trying to hold.
January highs at 1158
The 50 day EMA at 1154
1142-1146 are the June highs and the October high (1142).
1128 to 1125 the September closing high.
Dow: Closed at 10, 440.58
Resistance:
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:
September high at 10,342
The 50 day EMA at 10,322
The 200 day SMA at 10,238
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 07
Productivity-Rev., Q3 (08:30): 1.8% actual versus 2.0% expected and 1.9% prior
Consumer Credit, October (15:00): $7.7B actual versus $6.0B expected and $13.6B prior (revised from $9.8B)
December 09
Export Prices ex-ag., November (08:30): 1.0% prior
Import Prices ex-oil, November (08:30): 2.7% prior
Initial Jobless Claims, 12/04 (08:30): 335K expected versus 349K prior
Wholesale Inventories, October (10:00): 0.5% expected and 0.5% prior
December 10
PPI, November (08:30): 0.1% expected and 1.7% prior
Core PPI, November (08:30): 0.2% expected and 0.3% prior
Michigan Sentiment-Prelim., December (09:45): 93.5 expected and 92.8 prior
Treasury Budget, November (2:00): -$53.0B expected and -$43.0B prior
SUBSCRIBER QUESTIONS
Q: As an active trader/investor I always watch overall market first and then dial into individual stocks long if the market is friendly. Step aside when market is mixed and short when the three big indexes are in sync going down.
Someone recently said, "Remember a stocks price=~50% market, 25% Sector and then 25% actual stock." Are you aware of this? or do you have any way to validate these numbers?
You continue to have the best commentary, esp. on economics, out there....pls keep up the good work!
A: We teach in the seminars (and we repeat here from time to time) something of the same thing but slightly different. We say that 75% of the stocks follow the overall market. This makes sense when you think about it. Stock prices are driven by earnings and when earnings are expanding overall, stocks rise overall. When they are contracting overall, stocks fall overall. That is the general rule.
Any individual stock, however, can have a different story that bucks the overall market. It can also pertain to sectors. When the market was struggling this year, oil stocks were not; oil prices were higher and they were moving higher in strong uptrends while the majority of stocks were struggling in their base. In 2004 the SP500 has moved mostly sideways but a stock such as RIMM has tripled. EBAY more than doubled in the same period. We remember DELL in the mid to late 1990's seemed to rally no matter what the rest of the market did. Recognize a common theme? Cutting edge businesses riding the crest of the technology boom, producing huge sales and earnings. It is not limited to just technology but works for the cutting edge in any industry.
Obviously the market is not populated with thousands of stocks with that kind of strength. Overall companies in the market are at various stages of life in their businesses, and their stocks reflect this. Most are not at the growth spurt stage and are at the cutting edge of their industry. Thus their prices do not defy the rest of the market as the elite leaders do.
That is why we say that 75% of stocks follow the big 'M' basically all of the time. It might be a higher percentage than that, particularly when the market gets to extremes either way, but it is a good general rule of thumb. You are approaching the market correctly by backing off when things get turbulent, when the weather starts showing signs of change. We are going to see how this big volume day pans out, but we are also still cognizant of the trend. Weather changes and storms blow in when a trend gets shaky. That is always a good time to seek at least some shelter.
End part 1 of 3
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