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us stock market, trade stock
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12/18/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: TYC
Trailing stop alerts: SNDA; OPTV
Stop alerts: 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:
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SUMMARY:
- Another drug warning and investors just wanted to get to the weekend.
- Government says consumer prices remain tame as oil prices slide.
- Economic data improving into year end, brightening prospects for 2005.
- Semiconductors can't buy a friend.
- Stocks end the week where they started, but given the events, not a bad showing.
- Short pre-holiday week, post-expiration may see trend resume, but we need to watch for the performance chasing to slow.
Investors retreat to safety of weekend as drug stocks shake their beliefs.
PZE joined MRK in the 'gee there may be something wrong with our showcase drug' circle, reporting that one test of Celebrex taken at high dosages suggested cardiovascular problems. Who cares that a second test did not reveal this problem; with MRK's problems with Viox, investors were not going to wait for the next problem. PFE was passed around like the last bottle of hooch in the hobo boxcar with volume making up 10% of NYSE's 1.8B shares. For good measure LLY warned doctors about the use of Strattera in certain patients, and investors solid it for good measure although the stock did come back well off of its lows. Its drug is not in the family of Viox and Celebrex, both Cox 2 inhibitors used for pain treatment. PZE was not 'celebrexing' Friday (hey, they came up with that commercial, not us), but it too recovered well from its lows, regaining $3.75 from its low. Seems investors finally read some of the reports about it being one report, high dosages (most take nowhere near that amount), etc.
Nonetheless, PFE set the stage for the market. A lackluster open, a half-hearted recovery attempt, a sell off for four-fifths of the session. Volume exploded on NYSE early, even before PFE opened as investors rushed to dump drug stocks. It almost had a panic feel to it in that sector. NYSE volume led NASD trade until mid-afternoon. A mid-afternoon bounce looked promising, something the market has pulled fairly regularly during this rally and even in the recent up and down action. The life was sucked out of that attempt in the last half hour as the buy and sell on close orders exploded volume upward as some major reshuffling in the indexes took place. The Russell was rebalanced and News Corp (NWS) went onto the SP500. The latter required a lot of selling in many stocks to make room for NWS. That is what tanked NASDAQ and SP500 in that last 15 minutes, almost to the second the buy on close orders had to be posted.
That explained the explosive volume. It was not all PFE and sellers going on a rampage though it looked like it with the all session selling and the late kick in the gut for good measure. When you back up and look at the charts, NASDAQ and SP500 finished the week in decent shape. There are still many questions the early month volume on NASDAQ raises where volume has exploded to levels not seen since the January 2004 market top. Another top in the making or just money managers racing in to chase performance and maybe spark a bit more momentum? The latter can lead to the former as they push stocks higher and then stop buying. That is still a big issue for us that remains to be resolved, but after two sessions of selling NASDAQ and SP500 are still in the uptrends and in decent shape to continue the holiday rally. Not many breakdowns and small and mid-caps looking ready to rebound. It is the season for holiday rallies, and despite the questionable action to start the month, the market is setting up to continue the move. That is, as long as this pullback remains contained as it has been thus far.
THE ECONOMY
Good week for economic data.
The regional manufacturing indexes not only recovered from a somewhat shaky November, but they did so with some flair. Both the New York and Philly PMI reports were exceptionally strong in both the recovery magnitude and the overall number. The strong trend in manufacturing recovery continues, and it continues to expand. The weekly jobless rate plunged last week after a worrisome three week climb. Retail sales were up and the October revisions were very strong to the upside. Indeed, at the current rate Christmas sales will rise better than 7% over last year. That is not a weak holiday session. Business inventories fell, and while that can be either due to falling production or rising buying, it appears this was more buying up existing inventories.
The good news has been overshadowed by the continuing worrying over the dollar and deficits (budgetary and trade), all brought into even more relief by the discussions of reforming social insecurity. There are so many born again budget hawks who think they had something to do with the surpluses of the late 1990's. No, they just got on board the train that left the station years before in the early 1980's that set up those surpluses by spurring unprecedented investment in the US and the related fall of the USSR. Huge growth and no more billions spent on the Cold War will do that. Now that we are in a long term war on terror and having to recover from a stock market crash and precipitous economic plunge (7+% GDP growth to negative GDP growth in a couple of quarters is precipitous) they want to raise taxes as the way to restore surpluses.
No country every taxed its way to economic growth and prosperity. While raising taxes increases revenues in the very short run, they also crimp investment and risk taking, and soon tax receipts fall because the economy, starved for investment capital, contracts. The tax cuts and investment incentives helped jump start an economy pummeled by the market crash, the economic plunge, corporate scandal, and 9-11 just to name a few major hurdles. Raising taxes cuts off both investment and consumption, crimping both the supply and demand sides. Moreover, those same newfound budget hawks balk at the idea of fixing social security by spending some money now to save trillions later. Not only that, but also ensuring better retirements than the preposterously low return social insecurity provides for our hard earned and quickly taken away wages.
On top of that there is the added economic boost from all of that money going back into the economy as opposed to being sucked up in the federal government and kept in some supposed 'lock box' or 'trust fund.' News flash: there is NO trust fund. There is no stash of money anywhere paying retirees. It goes from your pocket, through the government, and then a portion goes into a current retiree's pocket. The rest of it is consumed by the bureaucracy. If each of us had been able to put half of our social security taxes into mutual funds since the time we started earning those accounts would be huge. Huge. Now that we have a change to free future generations and at the same time added a huge extra goose to the economy, those wanting to hold onto power by the old means, i.e., keeping the purse strings in a parental economy, are going to start the shrill screaming about poor old grandma being turned out in the cold. Hopefully rational thought and strong will wins the day.
Consumer prices rise but in line with expectations.
Producers are passing some but not much of their costs to consumers. The overall and core CPI rose 0.2% in November. The core was paced by auto price increases, but falling oil prices offset that rise. With oil prices making their strongest weekly run in almost 5 years this past week that always makes you pause. Lower heating oil inventory build along with a cold week and another cold week expected in the US has put a bid back in oil for now. Food was up along with education and insurance. Once again, those items that we have to pay for on a regular basis rose. That is no secret to any consumer.
As measured by the government price gains remain modest. As long as the government measures them consistently then they would tend to show what the trend is. Apparently the Fed believes the government is doing it right as the FOMC statement last week read that inflation remained well in check. Of course the Fed disagreeing with government statistics would be similar to the President's press secretary saying the President's policies were wrong.
Some price rise is expected as the economy is recovering, even more so with demand leading supply since the recovery started. As we noted at the time, supply has to be ready to meet demand, and the first tax incentives were all demand related. After the big plunge in business activity that left massive inventory overhangs, companies have been loathe to get in that situation again. Thus the caution all the way up the recovery in hiring, production; just about everything but CEO salaries.
Prices are rising, but by government standards they are not showing pernicious inflation. The Fed has raised rates some, given itself some maneuvering room in the event of another crisis, and is helping pinch off some inflation in the process after almost letting it get out of control. In fairness, the recovery appeared to be somewhat shaky at times and the Fed was being somewhat cautious.
Semiconductor book to bill posts gains but forecasts are not great.
Chips received a couple more downgrades last week to go along with the downgrades the week before. Late Thursday the chip equipment book to bill came in at 1:1, meaning for every $100 of orders shipped, $100 in orders were received, up from the 0.96 ratio the prior month. Decent news though you like to see more orders coming in that shipments.
Forecasts for 2005, however, are not rosy. Chip production peaked in June 2004 at 94.6% and has declined since. Friday Gartner Group predicted that after a 60% growth rate in chip production in 2004, 2005 would drop 15%. Rising inventories are the main culprit as the chip industry is falling into the problem that other industries are trying their best to avoid. On the positive side, cheaper chips mean lower price other goods. After all, chips are in everything, including humans now.
THE MARKET
Stocks ended the week selling lower Thursday and Friday, giving back the gains from the early week rise. It was not a great move higher, scratching all the way. Volume was rising on the way up but was stronger on the way down. Hard to gauge the price/volume action, however, given quadruple witching Friday and the Russell reshuffling. The selling volume was heavy, but it is explainable.
We are still looking at the surge in volume to start the month, volume that has remained quite solid. As noted it has not been that high since January 2004, and it is most likely due to fund managers that did not watch what the market was doing, particularly leading stocks, and bought when they were telling fund managers to buy. Thus they are playing catch up now, trying to take part in a holiday run and put some gains in their portfolios so they can send out glowing 'buy me' reports in Q1.
That can keep the move going, particularly given it is historically a time when stocks rally when the market is decent. Fund managers push more money into the market and that makes its own momentum. The problem is, when they stop that momentum stops as well. The move this month, unlike November, has lacked strength and is quite indecisive. When the fund managers call it quits that can spell the end of this move.
The end of the week was not as bad as it could have been. Stocks faded but held the trend. They can come back a bit more and still be in the uptrend. In addition the small and mid-caps look ready to try another advance. We see some potential double tops on NASDAQ and SP600, but that is a very small piece of the overall pattern that shows a strongly entrenched uptrend. The early month volatility remains a real concern along with raging bullishness. That is adding up to a problem with this move at some point. Again, with the seasonal pattern and the firm uptrend in place, this modest pullback can set up a further run higher near term.
Market Sentiment
VIX: 11.95; -0.32
VXN: 18.21; -0.39
VXO: 12.71; -0.3
Put/Call Ratio (CBOE): 0.84; +0.16. Lots of option activity on expiration with positions being rolled into next month, etc. Thus we don't put too much emphasis on this particular report.
NASDAQ
Fell back again on rising volume, continuing the break back through the January 2004 high (2154). Gave up that level but still in good shape in the uptrend.
Stats: -10.95 points (-0.51%) to close at 2135.2
Volume: 2.52B (+4.71%). Volume was running low all session, coming in well below Thursday levels. Volume exploded in the last half hour as the Russell reshuffling resulted in a lot of last minute trading. Thus we don't really view this as a distribution session. Not a strong session, but not as weak as a strict interpretation would indicate.
Up Volume: 987M (+220M)
Down Volume: 1.482B (+14M)
A/D and Hi/Lo: Decliners led 1.03 to 1. Very modest downside breadth, a very good internal signal that the selling was not as ugly as the volume indicated.
Previous Session: Decliners led 1.61 to 1
New Highs: 125 (-18)
New Lows: 9 (-7)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Fell through the 10 day EMA (2139) but that was not a big deal. NASDAQ broke below 2154, the top of the 2004 base, Thursday. It continued the downside move Friday but even with that higher volume the move was not dire. A good uptrend remains in place even with the two days of selling. A further pullback to the 18 day EMA (2124) would be a good set for the next run higher in the continuing holiday rally. After the expiration and reshuffling volume last week, however, the volume needs to fade on a further pullback to test the 18 day. If it does not, not a good sign. Remember, that early month volume jump and the basically sideways move, unable to make headway are warning signs of high volume turnover where the early buyers in the rally are selling to the late comers, i.e. those fund managers rushing in to get in on the year end rally.
NASDAQ 100 has already made it back to the 18 day EMA, posting a larger loss (-0.7%) than the overall NASDAQ. It does not have the room to maneuver here that overall NASDAQ has.
SOX tapped the 50 day EMA (420.74) on the low and managed a modest comeback. Still trying to continue the move off the 2004 low and rebuild the base, but it has failed three attempts to clear the 200 day SMA (433.76). It is narrowing between these two levels and is going to make a breakout one way or the other.
SP500/NYSE
The large caps were in need of Celebrex (in modest dosage of course), selling back through 1200, closing near the low. Still in the uptrend, however.
Stats: +42.09 points (+0.25%) to close at 1194.2
NYSE Volume: 1.813B (+1.22%). Volume spiked again as PFE's drug problem and the News Corp addition to the SP500 caused a lot of share transferring. As with NASDAQ, technically a distribution session but there were those extenuating circumstances.
Up Volume: 995M (+205M)
Down Volume: 1.45B (+468M)
A/D and Hi/Lo: Decliners led 1.01 to 1
Previous Session: Decliners led 1.89 to 1
New Highs: 190 (-58)
New Lows: 23 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Sold through 1200 and the 10 day EMA (1194) but still in the uptrend and above the 18 day EMA (1188.75) that has acted as support on the rally from the October low. That is going to be the key level to watch early this week as the large caps try to put it back together after the PFE news. Again, still in the uptrend and never showed the poor price/volume action that NASDAQ showed to start the month.
After looking pretty weak Thursday, SP600 (small caps) tapped the 10 day EMA (322.24) on the low and rebounded to close with an ever so slight gain. Still in a potential double top, but a higher low here on this second test of the November breakout would be a very good indication for the overall market as this leader recovers and breaks higher.
DJ30
Take away PFE and it was not a bad session for the blue chips. Volume exploded on the PFE trade, but again, it was mostly PFE that set DJ30 volume racing. Still, GE and IBM volume jumped well above average on declines though offset by gains on strong volume by JNJ and UTX. In short, the stocks were all over the map as DJ30 pulled back, but it is still holding over 10,600, a level that was some pretty pesky resistance on the way up. Want to see it hold that level on a test early this week.
Stats: -55.72 points (-0.52%) to close at 10649.92
Volume: 619 million shares Friday versus 293 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
A shortened week with Friday closed all day for Christmas. Final Q3 GDP, leading economic indicators, durable goods orders, personal income and spending, Michigan final (again?), and new home sales are the main economic attractions. Plenty on the plate to go along with a short week that will most likely see some lighter volume as money managers take much of the week off.
That light volume can continue the trend in place. Typically a market moves in the direction of the trend when trade lightens during holidays. After an early test a bit lower to start the week we are going to look for stocks to rebound and continue a modest rise. How strong remains to be seen. The gains last week before the end of the week selling were scratched out. We would really like to see a solid upside point surge into Christmas and the year end, volume or not, but we will take what the market gives. If it scratches out some more gains we will follow positions upside with trailing stops.
As for new positions we will still look for solid breakouts or rebounds from leaders testing their moves. This pullback is presenting some opportunity in that respect. Again we will look for the leaders that have eased back to near support on lower volume that are not too far into their runs. If the move back up is short lived for the market they can still give us a decent gain.
If heavy volume selling continues after expiration and the reshuffling, that is reason for concern as that indicates the early month volume surge on NASDAQ was not just a short term phase. That would be surprising given the uptrend and seasonal pattern, but as we have noted before, we don't want to get complacent and assume the trend will continue just because it is in place and the season is right. If the price/volume action does not improve we will be quick to protect positions.
Support and Resistance
NASDAQ: Closed at 2135.20
Resistance:
January high at 2154 (early 2004 high).
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
The 18 day EMA at 2124.85
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2059
2050, prior resistance and the June high.
S&P 500: Closed at 1194.20
Resistance:
1200 acted as resistance on the last trip higher.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 18 day EMA at 1188.75
1180 to 1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1165
January highs at 1158
1142-1146 are the June highs and the October high (1142).
Dow: Closed at 10, 649.92
Resistance:
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
Support:
Price consolidation at 10,600 level
10,570 is the early April high
The 18 day EMA at 10,567
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the recent range.
The 50 day EMA at 10,404
September high at 10,342
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 20
Leading Economic Indicators, November (10:00): 0.2% expected and -0.3% prior
December 22
GDP-Final, Q3 (08:30): 3.9% expected and 3.9% prior
Chain Deflator-Final, Q3 (08:30): 1.3% expected and 1.3% prior
December 23
Durable Goods Orders, November (08:30): 0.5% expected and -1.1% prior
Personal Income, November (08:30): 0.3% expected and 0.6% prior
Personal Spending, November (08:30): 0.2% expected and 0.7% prior
Initial Jobless Claims, 12/18 (08:30): NA expected and 317K prior
Michigan Sentiment-Rev., December (09:45): 95.4 expected and 95.7 prior
New Home Sales, November (10:00): 1200K expected and 1226K prior
End part 1 of 3
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