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us stock market, trade stock
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12/11/04 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: AAPL; IWOV
Trailing stops issued: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Stocks remain mired in the mud after falling back into the range midweek.
- OPEC promises production cut, oil price falls.
- Producer prices still climbing but consumer sentiment higher.
- Layoffs continue in large corporate America
- Resting for the next move higher versus running out of gas.
- Christmas run part two or epilogue?
Investors leave stocks status quo into the weekend.
The holiday rally took a downturn last week, unable to push higher following the strong upside move two Wednesdays back. Given the size of the run to this point, taking a breather is not totally out of character. The sharp downturn Tuesday on NASDAQ, however, was not the kind of rest you want to see. The market managed to buck up and hold its range after that fall, but that was all it could do
At least it did not continue the selling despite some less than good news. Jobs weighed on investors with jobless claims rising for the third week along with private reports of more layoffs and company reports of the same. OPEC announced production cuts. Producer prices rose sharper than expected. Japan once more showed its economy is still not ready to burst to life.
None of that was the type of news to deliver a head shot to the market, and most likely not a gut shot (in the old west that meant an agonizing death). It gave the market some indigestion, and it spent the week letting it pass.
After breaking out from their ranges following a good run higher, the indexes have been unable to push the ball forward. Leading stocks are testing their moves, letting out some air along with the overall indexes. Overall, however, very few are breaking down and the indexes have done nothing more than pause during the rally higher. The semiconductors are the weak link, having to absorb a lot of bad news last week ranging from downgrades to warnings. There was somewhat upbeat news from NSM, but that was not enough to turn the tide for the group. It gave up the 200 day SMA and is trying to rebound off the 50 day.
Again, the other indexes remain in decent shape, holding their uptrends as they try to further consolidate their gains for a further holiday run. Indeed, there is some rotation still ongoing as the small caps and techs have started to lag while the large caps start to show relative strength (large cap techs particularly). Rotation is a sign of a healthy market. Thus though the week ended frustratingly with stocks seemingly stuck in three feet of gumbo mud, there was no real damage done, nothing to change the trend. With plenty of time before Christmas and the New Year, this pause can give stocks their second wind on this move.
THE ECONOMY
Layoffs continue their increasing pace into year's end.
Friday Delphi (auto parts, components) announced 8300 layoffs. It was just the most recent of a strong of big companies announcing new, substantial layoffs. There was about a 12 month lull where job cuts had finally hibernated, but they are waking up just before Christmas. Nice lumps of coal for the stocking this year. Challenger Gray had been reporting rising layoffs, and the past three weeks the weekly jobless claims bumped back toward 350K after a nice downside trend.
We don't want to beat a dead horse, but the economy remains one in transition. The promise of all of that 1990's technology never appeared in the 1990's. The roots of the technology were formed in the 1980's when the massive capital investment paved the way for new ideas, new chances taken. The 1990's were the stage of expansion after the foundation was laid. New companies exploded onto the scene in a massive growth spurt, vying for supremacy in the development and marketing of these new technologies. Everyone knew they could not all survive, and the bust hastened by the Fed and poor economic policies was the shakeout of the fluff, winnowing the field to those that would actually provide the technology to those that would use it.
Now the economy is actually putting that technology that was developed to use. Productivity still grows; in the large, mature corporations it is still growing at a rate faster than the national average as those older companies put it to work as they work to trim costs as the way to increase profitability in a mature business. Cutting costs is just about the only way a mature business at a plateau of growth can increase profitability and thus its stock price. What we are seeing is that drive toward cost cutting, and the most expensive part of any business is the labor force. It does not take a lot of deduction to figure out what areas companies are working on reducing overhead. Indeed, the numbers of layoffs show it.
This of course reignites the debate about jobs versus productivity, outsourcing, etc. and what is best for the US near term versus long term. That is the key right there; near term it is misery, but longer term it leads to raised standards of living as this allows allocation of assets to develop new technologies, services, etc. It is similar to the discussion regarding revamping social security. Some say it is too costly short term and would rather leave it as is, hoping somehow massive prosperity will pay for the inevitable massive payments that must be made. Others would prefer to pay a little now versus pay a lot later (you can pay me now or you can pay me later as the auto parts commercial went). In the long run you are better off, freeing up the future generations from having to support everyone else on basically a one to one basis (the old joke about the new IRS form comes to mind: What did you make this year? Send it in.). Near term there is a gap due to the switch. Pay me now, or pay me (a lot more) later.
Producer prices still stronger than expected, but core lower and in line as energy prices still dominated the increase.
Producer prices rose 0.5% in November, greater than the 0.1% expected but much lower than the 1.7% reported in October. The core was in line at 0.2%, and that was down from the 0.3% gain in October. As you suspect, much of the gain was in energy as prices were rising again at that time, not falling as they have been the past few weeks. Overall energy was up 1.8%, well off the 6.8% October gain. Food prices were strong as well, up 0.4% but also well off the October level (1.6%); those tomatoes are still high and the fast food restaurants are still limiting quantities.
Producer prices have not been finding their way into consumer prices at the same rate they are rising. That puts a pinch on corporate profits and would ultimately impact stock prices in a static growth environment. What many forget, however, is that the economy is enjoying solid growth and is anticipated to do so next year. Growth is the elixir for just about everything economic. Moreover, it certainly won't hurt businesses that energy prices are falling once more.
Oil prices tank as OPEC promises to cut production.
OPEC is trying to figure out just how elastic the link between oil prices and western economies is. It has never been easy to gauge, and OPEC has hurt itself in the past by keeping production levels too tight, driving prices up too much, and then suffering as the west fell into recession and usage along with price went down. On top of this conundrum they now have to factor in a falling dollar, the impact of issues beyond supply (e.g., the terror premium), and how rapidly Asia, including the big fish China, is slowing.
The market, as usual, is figuring it out for them. Even though OPEC announced a 1M bbl/day reduction to take effect over the next 14 days, oil prices fell $1.82 to $40.71/bbl. That is getting very close to breaking that psychological $40 level that will have a positive impact on consumers. Note how after the break through its 50 day EMA and the kiss goodbye it has tanked but is bouncing some near this level. Just as it tanked after trying but failing to hold the 50 day EMA, when it breaks through $40/bbl we expect to see another sharp decline to near $35/bbl. Plenty of supply now that hurricanes are over and the Iraq pipelines are pumping, the reduction of the terror premium, and the slowing in China as well as Japanese sluggishness are all having their impact.
Michigan December sentiment rises.
Maybe those falling oil prices are helping, or maybe the preliminary December survey just got it wrong as it often does, but consumers are purportedly feeling better in December. That is the story at least with respect to the 200 or so early responders to the Michigan survey. The 95.7 reading was much improved over the November 92.8 reading and better than the 93.5 anticipated. Both current and expectations were up, with current the strongest at 106.8 and expectations at 88.8. Good numbers but below the earlier 2004 levels. The difference is negligible, however, as the month to month changes have been slight in the bigger picture. Again, you cannot read too much into this early number, just that it is still at good enough levels.
THE MARKET
The close to the week was frustrating. Stocks looked ready to move two weeks back with strong upside breaks from the lateral consolidations. That move waffled, stalled, and then sold back harder last week. The action was more like the market before this rally: showing a flash of strength just to give it up. Fortunately stocks managed to check up and stem the losses. Indeed, with the modest late week bounce the indexes managed to hold the breakout from the late November trading range.
That leaves them well-positioned for a resumption of the holiday rally if they can shake off the early distribution last week. Though they have faded during this consolidation/pullback, the stronger stocks continue to hold support and their trends just as are the indexes. It is very easy to get frustrated in this type of action when stocks appeared stuck in the mud.
With the indexes and most stocks still holding up, we remained as patient as possible, closing those positions that looked to be struggling too much, taking positions but only when they showed solid action in a weaker market. Again, patience while the market goes through this pullback and sets up for the next move.
Will it move? The question is debated hourly on the financial stations. The action in the market weakened last week, but it was not a major shift in the trend. Thus far this looks like a pretty typical rest after a good move higher though, as usual, there are twists such as the breakout move two Wednesdays back that was pushed back. The economic outlook has not changed appreciably, at least not to the worse. The economy is showing better growth than anticipated, it appears there is going to be rapid action taken on social security reform, tax benefits have been extended that were set to expire at year's end, and oil prices are fading. In short, things are improving versus where they were at the start of the rally. After this rest stocks will be ready to advance again unless distribution continued, and we should also not forget market sentiment as well.
Market Sentiment
Bulls versus bears: Bulls, bulls everywhere. Last week saw bulls rise to 60.8%, well above the 55% level considered bearish. Meanwhile bears drifted lower toward the bearish 20% level, coming in at 21.7%. In late August/early September bulls fell to 40% while bears rose to 30%; that played a part in triggering the rally that started on NASDAQ.
These levels continue to raise a caution flag for this rally. Overall the indexes are performing well, but when everyone is a bull and in the market, where does the additional cash come from to drive stocks higher? This is waving a caution flag, and if we see more distribution in the indexes time to get really cautious.
VIX: 12.76; -0.12
VXN: 19.57; -0.27
VXO: 13.2; -0.03
Put/Call Ratio (CBOE): 0.63; -0.2
NASDAQ
Went nowhere on volume that lacked the strength to take it anywhere. Managed to hold above the late November trading range, trying to recover from the Tuesday selling and set up the next move higher. There are a few things to be cautious about here.
Stats: -0.94 points (-0.04%) to close at 2128.07
Volume: 1.817B (-21.28%). That is a volume drop. Volume fell below average for the first time since the two sessions sandwiching Thanksgiving. Low volume consolidation is good. Volume, however, has not been very low the past two weeks. Indeed, as a whole it has not been this high since January 2004 when the great rally off the October 2002 low peaked. The market looked to be pausing at that time as well during a continued run, but volume surged, there was some distribution, and it slipped into an almost year long base. This jumping volume just as NASDAQ tries to take out that former peak is a caution flat as well.
Up Volume: 841M (-299M)
Down Volume: 949M (-177M)
A/D and Hi/Lo: Advancers led 1.17 to 1. Advancing issues recovered late in the session to positive even as the index faded to close negative. Breadth has been negligible either way since the heavily negative trade Tuesday.
Previous Session: Decliners led 1.27 to 1
New Highs: 91 (-5)
New Lows: 15 (-15)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After the Tuesday heavy volume selling the techs managed to find support at 2100 over the top of the late November range, bouncing modestly off that level. Volume declined each session as it made the bounce; no big rush of buyers back into the market, but no higher volume selling either. This is an important level for NASDAQ to hold and continue the move. May take a few more sessions to work laterally over 2100 and then try the move again. As noted, we don't want to see any more distribution after the failed attempt to breakout over the early 2004 high at 2154. Critical time for the NASDAQ.
The large cap techs in NASDAQ 100 closed out the week below the recent highs but still holding the breakout over the January high.
SOX gave up the 200 day SMA (435.72) earlier in the week, struggling to hold the 50 day EMA to close out the week. Plenty of bad news (downgrades, warnings) earlier in the week was more than the decent earnings NSM reported could offset. It is holding over the early November consolidation range and the 50 day. It needs to make a stand here.
SP500/NYSE
The large caps lost ground, but on lower, below average volume and still holding in the four week range. Unlike NASDAQ, no volume surge on this consolidation. The large caps have started to outperform, and this is another sign of that.
Stats: -1.24 points (-0.1%) to close at 1188
NYSE Volume: 1.438B (-11.49%). Almost the lowest volume of the week. NYSE is showing better price/volume action than the rest of the market.
Up Volume: 666M (-280M)
Down Volume: 745M (+90M)
A/D and Hi/Lo: Advancers led 1.25 to 1. Meager advance, helped by the leadership of the small caps.
Previous Session: Advancers led 1.17 to 1
New Highs: 196 (+55)
New Lows: 13 (-33)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps continue in their 4 week lateral move after the breakout that sent them out of the 2004 base. Tried the next breakout to start the month but could not follow through. Volume has not raced higher as on NASDAQ, however, coming in mostly at or below average during this consolidation other than the breakout attempt when it rallied. That is more befitting a consolidation. The large caps are showing some relative strength, some leadership. All are positive signs and act to counterbalance the high volume, somewhat volatile action on NASDAQ.
The small cap SP500 actually led the market Friday, posting a 0.3% gain. Once more the small cap index held above the mid-November consolidation and the 18 day EMA (317.72). Bigger picture, this is just the second test of the 18 day EMA since the index broke out in early November. That still leaves plenty of upside on this move. Before this pullback it was 14% above its 200 day SMA (287.70). It is now about 11%, giving it some more upside room on this move.
DJ30
The blue chips rebounded Thursday on strong volume but stalled out Friday. Still in the 4 week lateral range, still working on the handle to its twelve month base. Some solid industrial names are making strong moves. We noted two weeks back that the market needed to have the blue chip index start supporting the move. NASDAQ is struggling without it, having to have led the market the entire move since late August. SP500 is showing some life, and now the blue chips and the large cap index need to provide breakouts again to help the market continue the holiday move. Needs to clear 10,600.
Stats: -9.6 points (-0.09%) to close at 10543.22
Volume: 242 million shares Friday versus 279 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
After a relatively quiet economic week that only saw oil flopping lower, this coming week has a lot of drama. The Fed meets Tuesday in a one day meeting to raise interest rates once more. Retail sales are out Monday, the trade balance Tuesday and current account Thursday will generate the usual hoopla about a debtor nation, and the CPI is out Friday. Plenty to drive the fears of investors.
Indeed, investors have been gun shy to move into stocks of late, finding reasons or excuses to avoid them. Rallies occur when investors have made up their minds and the more esoteric arguments and data don't really faze them. After this period of fearing the shadows (declining dollar, trade deficit, a retail holiday season that may not be blowout) we will see if investors once more start to ignore the news. With the Fed meeting Tuesday, once that is out of the way investors may find a reason to get back to it.
Speaking of the Fed, we are already hearing talk of the Fed raising one more time then going on hold. We heard the same talk before the last meeting, but the Fed gave that idea a cold shoulder, changing nary a word in the statement. The hope rises again before each Fed meeting, but with the Fed bound on raising rates to 3%, it is not going to stop right now, particularly with prognostications about the economy next year on the rise.
Thus the market will likely remain quiet into the meeting, soften some afterwards when the hope goes unfulfilled, and then find some purchase for the upside. As long as the overall economic news is decent in other respects, investors should find reason to put some money to work.
Again we will be watching for any further distribution on NASDAQ, particularly given the very high bullish sentiment levels, though based on the action of leaders and SP500 the market still looks ready for further upside. With this pullback to near support many stocks are near levels where they should find some support for a solid rebound if investors decide it is time after a four week lateral move.
Support and Resistance
NASDAQ: Closed at 2128.07
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 2106.57
Price support at 2090.
The April high at 2079
2050, prior resistance and the June high.
The 50 day EMA at 2039
October high at 1971
S&P 500: Closed at 1188.00
Resistance:
1200 stopped the last move.
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.
The 18 day EMA at 1179.79
1175 second high in that double top that spanned late 2001 is trying to hold.
January highs at 1158
The 50 day EMA at 1157.78
1142-1146 are the June highs and the October high (1142).
1128 to 1125 the September closing high.
Dow: Closed at 10, 543.22
Resistance:
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the recent range.
September high at 10,342
The 50 day EMA at 10,345.55
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 13
Retail Sales, November (08:30): 0.0% expected and 0.2% prior
Retail Sales ex-auto, November (08:30): 0.3% expected and 0.9% prior
Business Inventories, October (10:00): 0.5% expected and 0.1% prior
December 14
Trade Balance, October (08:30): -$52.4B expected and -$51.6B prior
Industrial Production, November (09:15): 0.3% expected and 0.7% prior
Capacity Utilization, November (09:15): 77.8% expected and 77.7% prior
FOMC Meeting, (2:15): 0 expected and 0 prior
December 15
NY Empire State Index, December (08:30): 20.0 expected and 19.76 prior
December 16
Housing Starts, November (08:30): 1980K expected and 2027K prior
Building Permits, November (08:30): 2000K expected and 2018K prior
Current Account, Q3 (08:30): -$171.0B expected and -$166.2 prior
Initial Jobless Claims, 12/11 (08:30): 357K prior
Philadelphia Fed, December (12:00): 20.5 expected and 20.7 prior
December 17
CPI, November (08:30): 0.2% expected and 0.6% prior
Core CPI, November (08:30): 0.2% expected and 0.2% prior
End part 1 of 3
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