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money investment, investing information
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12/08/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: OPTN
Trailing stops issued: SIMG; AMT; MSCC
Stop alerts issued: NANO; HYSL; SLR; MONE
SUMMARY:
- Stocks fight back, but it is a struggle.
- Japan toying with recession, metals plunge.
- Foreign buyers still snapping up US treasuries with good reason.
- French winemakers whining for compensation as sales to the US drop.
- Volume remains strong as stocks struggle with a recovery attempt.
- Chips looking at another turbulent session with some after hours warnings.
A higher close but a volatile session.
After a pretty solid licking Tuesday stocks showed some backbone, opening higher, fighting off a morning selling bout, finding support at a key level, and then working steadily higher most of the session. Sounds pretty ordinary, but it certainly wasn't. The action was quite volatile; every time it looked as if stocks were embarking on a stronger bounce it was pushed right back. The buyers ultimately won the day, but it was a brawl the entire session. Sure it looked tame when you look at the final numbers, but watching buy and sell orders battle it out all session left us exhausted even though we did little in the way of buying given the market conditions.
What we did like was SP500 holding the 18 day EMA and the 1175 support area and rebounding on some continued solid volume. We also liked how the small caps responded to the selling, retaking the 18 day EMA and actually leading the market on a percentage basis (+0.7%, mid-caps +0.6%). NASDAQ 100 led overall (0.8%), but in the absence of SOX (sold off below the 200 day SMA on a BAC downgrade), that was a positive as well.
Thus while stocks showed some continued upside bias by immediately rebounding after the Tuesday distribution, the upside move was not overpowering, at least in terms of the Tuesday selling. Volume was overall lower, breadth was mediocre, and the upside moves were mostly pensive as buyers dipped a toe in the water to see if piranha would bite it off. Stocks held where they had to hold, but that is about the extent of it.
THE ECONOMY
Japan weakly limping along.
We reported a week back that the dollar's fall against the euro and yen, when viewed from an economic growth basis, was deceiving. Japan is hoping to grow 2.8%; quite a 'resurgence'. The EU even lower. With the US set to grow 4% in 2005, it is pretty clear the dollar is weaker for different reasons, one being it was historically much too high.
Wednesday more information about world economic growth came out, specifically Japan's Q3 GDP. It surged 0.2% those three months. Better get out the buckets of ice to cool it down. Expectations were not great, but 0.2% is weak. Indeed, it is fanning the fears that Japan may once more slip into a recession, something it just missed doing this quarter as growth was positive, albeit weakly so.
With Japan so weak, metals opened the session diving lower. Seven percent drops were notched on the open in gold and platinum. They managed a recovery into the afternoon, but a weaker Japan was interpreted as a weaker Asia, and that translated (by the transitive property of economics, a theory that does not work) into weakness in all of Asia, e.g., China. With china building literally everything in a mad dash to catch up to the twentieth century (the twenty-first is simply out of reach for now outside of Hong Kong) before the Olympics, its economy is not going to melt down. Think of it as the US trying to build all of the infrastructure created from the 1950's to date in 10 years; that is the furious pace China is expanding at. China is not going down the rat hole anytime soon, but Japan is concerned.
Foreign buyers storm into 5 year Treasury auction.
Given Japan's tepid growth and the fear a stronger yen could further truncate the raging recovery, it was no surprise (at least not to a few of us) that the Treasury action of 5 year notes Wednesday was dominated by foreign investors. 65% of the buyers were outside the US. As with the auction last month where foreign buyers also stormed the Treasury market, there is no lack of foreign buyers despite all of the drumming regarding foreign flight from US investments.
As we have written about before, there are many reasons. With Japan's 'recovery' teetering on the recession precipice, the last thing Japan wants is a stronger yen vis- -vis the dollar. With the huge foreign involvement in the auction, it is apparent Japan was in there buying up treasuries to try and strengthen the dollar versus the yen. The dollar did in fact rise as the combination of US economic strength versus Japanese weakness brought buyers in for safety as well as the Japanese bank supporting the dollar.
This leads right into our prior writings about how many other world economies had geared their economic output toward satisfying US demand during the past 15 years when the US economy so dominated the world. Many economies depended upon the US consumer and business consumer for survival. The last thing these countries want to see is a weak US economy and a weak US dollar. That is another major reason we continue to see such strong foreign support of the dollar and US investments despite all of the speculation about the trade gap leading foreign investors to look elsewhere.
How outsourcing actually helps keep foreign investment in the US higher.
There are even more specific examples cropping up over the past few years (at least as far as publicity) as to why foreign investors (e.g., foreign governments) support the dollar and the US. The oft-lamented outsourcing issue sees former US jobs in Ireland, Pakistan, India, South America, etc. It is a fact that companies desiring to compete on an international level need to take advantage of the same resources as foreign companies.
Thus we see burgeoning classes of workers in India, China, Pakistan, etc. working for US companies. As with those countries that geared their economies to serve the US consumers in the 1980's and 1990's, these countries do not want to see those US businesses suffer an economic downturn and thus cut off or reduce the source of the affluence their countries are starting to enjoy by virtue of a growing, working middle class. They too will do what they can to support the US economy, including investing in the US in order to keep this symbiotic relationship going.
The US is the rich uncle supporting the world economies.
The past twenty years has seen other economies rise in spurts to top US economic activity and consumption, but year in and year out the US is the consistent consumer of world goods. You can always count on the US consumer to buy foreign goods. That is why so many countries around the world have geared their production to fit US consumption tastes. More recently countries enjoying the prosperity from outsourced US jobs very much want to keep the US prosperous so the jobs will continue.
These are powerful factors that have been completely overlooked by the textbook economists populating the financial shows who view all economics through one lens and try to fit every situation into the round or square holes that are drawn in their economic textbooks. In doing so they are missing the biggest trend in the world economy, one that mimics real life relationships that we all know exist. The world is not made up of hundreds of independent economies. Maybe with respect to geographic borders, but not in reality. The world economies have a rich uncle financing their lifestyles. They are going to do everything they can to keep that uncle healthy so he can keep that money stream flowing.
The French connection.
Just look at France. Winemakers, stung by the falling dollar and US boycotts, are demanding compensation from the government because they view the French government's actions as turning off their main source of income, the US consumer. The French public can clamor against the US and what they view as our idiocy all day, but when the wallet gets hit, they want some action taken. The seeds of political unrest are being sewn in France. Chirac is being labeled more and more as a corrupt politician, and the ramifications of his 'independent nuclear deterrent' approach similar to Franco is not overcoming the reality that France depends on the US economically just as much as it did militarily in WWI and WWII.
In sum, while the economic topic de jour is the potential impact of a growing trade gap, the actual evidence shows no indication that the investment is slowing. Indeed, countries have so much more invested in a strong US economy than just deciding whether to buy US Treasuries as a good investment that it would take much more to rattle investors enough to get them to abandon the US.
THE MARKET
Stocks fought back gamely, but it was certainly no clear, in your face response to the Tuesday higher volume dump lower. Some lost ground was recouped and volume was decent, but breadth was modest, leadership questionable as stocks struggled to keep the upside move alive even intraday.
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
NASDAQ held above support at 2100 and scratched out a modest gain. Strong volume but lower than the Tuesday trimming.
Stats: +11.45 points (+0.54%) to close at 2126.11
Volume: 2.41B (-11.48%). Never thought that a 2.4B share session would be an 11% drop in volume. Good trade, but hard to top the Tuesday distribution session.
Up Volume: 947M (+33M)
Down Volume: 1.448B (-338M)
A/D and Hi/Lo: Advancers led 1.26 to 1. Very meager showing contrasted with the Tuesday downside breadth. The move up was a start, but just a start.
Previous Session: Decliners led 2.96 to 1
New Highs: 71 (-37)
New Lows: 21 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tapped toward the late November consolidation range at 2100 (2110 on the low) and then posted a hard fought half percent gain. Basically the session did little to change the status. NASDAQ continues in its uptrend of the August and October lows but has not clearly resolved the implications of the big Tuesday dump lower. It held above near support, still showing some strong upside volume.
NASDAQ 100 led the market, holding the 10 day EMA (1594) and posting a gain on that solid though lower trade. Still in the uptrend, still poised to rally, but also still resolving the Tuesday harsh selling.
SOX broke below the 200 day SMA (436.55) Wednesday on a BAC downgrade of seven key stocks (e.g., XLNX, NSM). SOX was struggling all session as a result, leading the downside and never coming close to positive. After hours, XLNX warned on sales as did CYMI. That hit an already weakened sector even harder.
SP500/NYSE
Held key support and it too managed to scratch out a modest bounce. Solid but lower volume as well.
Stats: +5.74 points (+0.49%) to close at 1182.81
NYSE Volume: 1.524B (-0.33%). Slightly above average volume once more though it eased back on the gain versus the Tuesday selling. Tuesday was not a blowout downside sell-a-thon, but it was distribution and the large and small caps could not muster more volume on the Wednesday upside move. Thus far this week the sellers are stronger.
Up Volume: 826M (+568M)
Down Volume: 683M (-577M). Pretty close ratio of up to down volume.
A/D and Hi/Lo: Advancers led 1.49 to 1. As with NASDAQ, a modest breadth victory even with the small caps getting off their duffs and providing some leadership once more.
Previous Session: Decliners led 3.22 to 1
New Highs: 88 (-59)
New Lows: 40 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
DJ30
Made its own modest recovery as well, retaking the 18 day EMA (10,473) as it continues to trade in the mid-November to present range (10,400 to 10,600). Lower, below average volume accompanied the bounce, indicating there was no real upside strength. DJ30 is wandering in this range, but given the Tuesday selling, holding the range is not bad.
Stats: +53.65 points (+0.51%) to close at 10494.23
Volume: 247 million shares Wednesday versus 258 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Hump day provided little hump for stocks to the upside. The hump was formed when the indexes dove lower on Tuesday, dropping out of a modest lateral move. The economic data Thursday (wholesale inventories, weekly jobless claims) is not likely to blast stocks higher or lower. Instead, stocks remain hung over from that smacking around they took Tuesday as buyers decide whether they want to rally stocks on into Christmas or are done with it. We still like the chances of another bounce toward the new year, but undoubtedly something will have to trigger the buying, i.e., get buyers to step back in after getting spanked Tuesday. With XLNX and CYMI from the semiconductor sector warning after the close, stocks will have even more headwinds to fight Thursday.
As noted, rallies in the holiday season can experience a day or two of sharp selling and then resume. Such is the nature of the beast. It is key that the indexes are still in their uptrends even with that sharp selling; they can pick up at the bottom of the trough and then continue the trend higher that is already in place. Seen it happen many times before in an uptrending market during the holiday season.
There were not many breakouts or solid rebounds Wednesday even with the market recovering. There were some but the breadth shows you the action was limited. Stocks are still mostly in position to rebound and continue the rally, however, if the buyers decide to move in. Given the lack of resolution and the fact that many stocks are still flirting with their near support, we are going to continue to look for volume upside bounces. Again, there were very few quality stocks doing that Wednesday. In addition we will continue to protect current positions that give up support and are not recovering.
Support and Resistance
NASDAQ: Closed at 2126.11
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 2101
Price support at 2090.
The April high at 2079
2050, prior resistance and the June high.
The 50 day EMA at 2031
October high at 1971
S&P 500: Closed at 1182.81
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 1155
1142-1146 are the June highs and the October high (1142).
1128 to 1125 the September closing high.
Dow: Closed at 10, 494.23
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 10,328
The 200 day SMA at 10,237
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
End part 1 of 3
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money investment
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