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money investment, investment help
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12/20/04 Investment House Daily
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Investment House Daily Subscribers:
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Christmas week schedule:
Market closed Friday.
Monday through Wednesday: Reports as usual
Monday 12-27: Reports resume as usual. Will issue alerts Monday on any new plays we find hitting buy points.
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MARKET ALERTS:
Target hit alerts issued Monday: None issued
Buy alerts issued: STN
Trailing stop alerts: None issued
Stop alerts: AUCD; MEDX
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/alertdly.htm
SUMMARY:
- Early bounce fades to modest losses on light volume.
- Leading economic indicators posts modest rise.
- Short term rates continue to rise on hawkish statements from new Fed governor while long term rates continue to languish.
- Large caps continue to show relative strength, but market struggles without smaller caps.
- Time for NASDAQ to rebound after pullback if holiday rally is to continue.
Stocks find no buyers after early pop.
Stocks bounced in relief of the Thursday and Friday selling that was caused mainly by position shuffling ahead of expiration and the Russell rebalance. Some good early volume moves from leaders gave at least some air of authority to the move. Stocks rallied well, at least until NASDAQ hit the top of its 2004 base. That flipped the switch and stocks spent the rest of the session selling. No strong volume distribution, just unable to find a bid. A better than expected LEI report and falling oil and natural gas prices did not stem the tide. Later on those commodities did not help as they rebounded to take back most of the losses. No bids to buy, oil moving back up; that gave little to move stocks. The best movers as a group were metals and energy, but they were not barnburners overall either.
It was noteworthy that on the lower volume the upside trend could not reassert itself, at least not after the first 20 minutes of trading. After the position squaring last week we wanted to see if the trend could resume. It was not a total loss Monday in that it failed to do so; the low volume pullback to NASDAQ near support sets up the bounce to resume the move. It sets it up, but of course, it still has to make the move. It helps that most stocks continued to hold their near support, indicating no strong selling to push then lower, to break the trend. NASDAQ still has to show us that early month volume spike was not a big money liquidation of positions after fighting back up to the early 2004 high. Again, NASDAQ is at a prime point to begin the rebound if it is going to show strength, making a higher low and trying the 2004 base resistance once more. In other words, at this point the pullback is still contained, but it is getting time to make the move.
THE ECONOMY
Leading economic indicators reverse slide, post higher than expected gain.
After 5 months of declines, this forward looking indicator posted a 0.2% gain, beating the 0.1% expected gain. The LEI is designed to look 3 to 6 months down the road, forecasting economic activity at that time. It is interesting that it started to dip during the summer slowdown and then continued up to the point where that slowdown was supposed to be registered by the economy. The past month or so the economy has turned back up, however, giving a somewhat mixed review to this indicator as to its predictive abilities this time around.
The report was mixed, however, as October was revised to 0.4% loss, more than the 0.3% drop originally reported. Given that downside revision, it is even more of a stretch than one positive month after 5 down to say the trend is reversing. On the other hand, the decline was not very steep or long in terms of putting the economic expansion in jeopardy. Indeed, the 115.2 reading Monday was just off the all-time high of 116.5 hit in May.
ECRI somewhat agrees with LEI.
The Economic Cycle Research Institute puts out a weekly indicator as well as longer term indicators, and they are reputed to give a better real-time look at economic activity. They turned lower ahead of the LEI in the late spring/early summer, accurately showing that slowdown to come. Over the past three weeks the ECRI index has turned higher. Last week it posted a 133.6 reading, up from 133 the prior week. The annualized growth rate rose to 0.8% form 0.5%. Last week's move was fueled by the sharp reduction in weekly jobless claims, something that has been volatile of late, but each week there has been a key element that has improved, giving these indicators a lift. It is not a blazing recovery, but it is the type of steady turnaround that can lead to much stronger gains. This indicator has a good track record of predicting upturns, and it is starting to show the kind of improvement that presages some economic strengthening.
Fed hikes on short end of curve have raised short term rates, but longer term are not following.
This is the opposite effect of what was seen as the Fed tried almost vainly to push rates lower after it killed off the economy in 1999 and 2000. Recall that the Fed was lowering rates at every possible occasion but little headway was made in goosing the economy. 'Pushing on a string' was one of the favorite phrases of the time. Now the Fed is trying to raise rates to stave off inflation. Similarly to 2000, short term rates are responding, but long term rates are not.
While at first blush that seems to be pretty cool because it slows short term lending but keeps the housing market in decent shape with low mortgage rates, in economic terms that describes a flattening of the yield curve. Flattening describes the pattern on a chart with rates on the vertical axis plotted against bond time lengths on the horizontal axis. What it means economically is that there is not as much demand for or premium on longer term bonds. In the most general sense that means there is less demand for money down the road than there is currently. In short, in absence of other factors it indicates a slowing economy down the road.
Right now that last part, i.e. down the road, is the key. The curve is not at a point of alarm, and indeed there are still very good signs of economic activity increasing as opposed to decreasing.
So how do you explain the flattening? Those claiming deficits cause rates to rise are once again being proved wrong. Those claiming that a falling dollar causes rising rates are also being proved wrong. Of course, despite the hype about the low dollar, it is still just above historical levels that were in relative equilibrium that preceded the dollar's historic rally against all other world currencies in the 1990's. Further, those arguing the dollar's ups and downs cause rates to rise or fall switch sides about every 5 years as the dollar does the opposite of what they said would happen. There is always some other factor at work, they claim, that upset their theory. In most circles that is called a failed theory, but in economics it is called recycling. As you probably gather, economics is more often about what is currently in vogue than what is historically accurate.
Got an economic problem? Interest rates will fix it (a.k.a., keep the Fed out of it).
There theoretically is a point where a falling dollar would potentially lead to inflation, i.e. when the dollar gets well below prior equilibrium levels. That has the potential to raise prices here as foreign goods grow substantially more expensive on a historical basis. Now the one surefire way for a lower dollar to cause rates to rise is for the Fed to adopt the view it has to protect foreign investment in the US.
We discussed this back in November when the Fed roiled the market one day when Greenspan's comments at a gathering of central bankers strayed to central bank action to buoy currencies. Under that scenario the Fed raises interest rates in order to make investments in the US more appealing as they would command a higher yield (the higher interest rate). As with most things it sounds plausible: want to attract more money, just raise the rates you will pay for it. But that puts Fed rate hikes and cuts in a position of being the cure-all for all economic aches and pains. Inflation a threat? Raise rates. Deflation a threat? Lower rates. Trade deficit too big? Raise rates. The snake oil salesmen of the 1800's were maligned for selling cure-all elixirs. The way the Fed wields the rate hike club one would be hard-pressed to see things differently. No matter what ails the economy, interest rates can fix it. This puts interest rates in the economic arena on the same plane as duct tape in red-neck America (What is one thing you will never hear a red neck say? Duct tape won't fix that.).
In reality the Fed, particularly Greenspan, threatens to use interest rates a lot when it is trying to elicit some action or change of behavior by Congress, investors, and/or consumers. Right not the Fed is on a deficit reduction and entitlements cut kick. Its reasons for deficit reduction are not embedded in actual historical evidence, just the Fed's own studies. If it helps Congress cut spending, then we can live with the bluff. With respect to the comments regarding keeping foreign investment in the US, we suspect Greenspan was making the same kind of threat or bluff. Again, we can live with it if it helps Congress agree to cut the budget and make reforms to entitlement transfer payments. The problem is, after awhile even the Fed starts believing it has to make the move or backs itself into a corner and has to make good on the threats. That is what needs to be avoided as we have seen the results of this before back in 1999 and 2000.
THE MARKET
This month has been interesting, at least in terms of figuring out what the market is up to. The trend remains in place, but the market has struggled all month following a solid November move. The highest NASDAQ volume since that index peaked to start 2004, some sharp selling, high volume position shuffling to end the December expiration, and a low volume test of near support Monday.
One key is that despite the surging volume and lack of gains (another way of saying there is some high turnover in shares) the trend is still in place. Bullishness is too high and we don't like the churn, but most leaders are holding hear support as are the indexes. A lot of running in place shows some erosion in the market, something that has us cautious. At the same time Monday showed a low volume pullback to support, finishing off last week's selling. Now it needs to show it has finished the selling and make a higher low here and continue the rally.
Why not just look to the large caps and their relative strength the past week (holding their breaks higher with no real distribution)? Because the market struggles without the small and mid-caps as well as NASDAQ helping lead the way. Breadth has eroded as these sectors have struggled, and that damages another pillar of the rally. Again, NASDAQ has reached the general area it needs to hold and start to rally once more, at least to show the move has remaining strength. With the high level of bullishness and the churning volume, it is time to start rebuilding the rally.
Market Sentiment
VIX: 11.83; -0.12
VXN: 18.21; 0
VXO: 13.61; +0.9
Put/Call Ratio (CBOE): 0.9; +0.06. Put/call ratio getting back up toward that point that has helped spawn rebounds in the history of this rally.
NASDAQ
Held the 18 day EMA on much lower volume than most of the month. After three days of selling this would be an opportune point to rebound, but it needs more strength.
Stats: -7.35 points (-0.34%) to close at 2127.85
Volume: 2.009B (-20.28%). Volume remained above average but well off the pace for the month. It was not too long ago that a 2B share day would be a big day indeed. With all of the year end performance chasing, however, volume has really jumped this month. That early month volume is still giving NASDAQ heartburn as shares were dumped.
Up Volume: 615M (-372M)
Down Volume: 1.299B (-183M)
A/D and Hi/Lo: Decliners led 1.71 to 1. Got a bit lop-sided as semiconductors struggled again, particularly considering the rather modest point losses.
Previous Session: Decliners led 1.03 to 1
New Highs: 144 (+19)
New Lows: 17 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Tried the early session rally in relief of the selling and then faded to close near the 18 day EMA (2125). That is the near support level we would like to see hold, and a further, lighter volume decline Monday to follow through upon and finish the late selling last week was not bad action. This was the move we were looking for and rallying from here would be a strength move. It has undergone a lot of turmoil this month even though it has not gone much of anywhere on a net basis (kind of like my dogs when we run together; they put in 3 miles to every mile I run). Similar to how we would feel after such a move, the market exhausts buyers with this kind of action. Need to see it make a good move near this area to offset that early month action.
NASDAQ 100 broke through the 18 day EMA on the close but the lower volume on NASDAQ blunted the move. Still, QQQQ volume moved back above average Monday as that fractional index continued the move below the 18 day EMA. NASDAQ is in a struggle, and with the overall market large caps showing relative strength, the large cap techs need to regain some leadership as well.
SOX was lower again, breaking down to test the 50 day SMA (417.73). It managed to hold there but closed near the session low as did the other indexes. Still struggling below the 200 day EMA (433.33). You could call this a handle to its base, but that would be fishing for positives. SOX has a lot of negative press about it right now, lots of downgrades to semiconductors in general over the past month, and the conventional wisdom is even more weakness in 2005. Gee, sounds like things are just about right for semiconductors. They are being sandwiched between the 200 day and the 50 day, and a resolution to the squeeze will probably be dramatic.
SP500/NYSE
Recovered from the dump lower Friday, showing good resilience and holding the break higher as volume tapered off.
Stats: +0.45 points (+0.04%) to close at 1194.65
NYSE Volume: 1.468B (-19.02%). Weak volume as SP500 went nowhere Monday. That was good, indicating the selling to end last week was driven by expiration, reshuffling, and some atypical news (PFE; with MRK as well, is it really atypical?). Anyway, good low volume hold of the break over the most recent range from early December.
Up Volume: 671M (-324M)
Down Volume: 724M (-726M)
A/D and Hi/Lo: Decliners led 1.02 to 1. Flatter than a pancake.
Previous Session: Decliners led 1.01 to 1
New Highs: 244 (+54). Not bad numbers all things considered (e.g., went nowhere while the small caps and mid-caps sold).
New Lows: 12 (-11)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Held right at the 10 day EMA (1194) as volume fell below average. This keeps SP500 above the recent closing highs from early December (1191), something that is good to see given that the index had a hard time getting out of the late November range. The large caps have shown relative strength to the rest of the market, and this is a good launch point for the next; would show some real strength if it could rally from here on a resumption of upside volume.
Small caps struggled again, but still closed above the 18 day EMA (320.47), just off that all-time high. A second peak formed last week right at the first peak (326.22). There are many premature conclusions that could be drawn from those twin peaks, but unless it breaks below the 18 day EMA on some ugly volume, they remain premature. In good position to resume the move along with SP500.
DJ30
The blue chips rallied to 10,735 again on Monday and then again gave it up by the close. Without PFE adding quite as many shares to total volume, trade back to more reasonable though still above average levels. Similar to SP500, DJ30 is perched above its late November and early December highs (10,592 closing) and in good position to continue the rally. DJ30 still has not taken out its high for the year (10,754), but it is tapping at that level on the intraday highs.
Stats: +11.68 points (+0.11%) to close at 10661.6
Volume: 298 million shares Monday versus a Celebrex-induced 619 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No scheduled economic data Tuesday, so the market will have to rely on its own wiles to advance. SP500, DJ30 and even the smaller cap indexes look to be in decent shape to mount another move higher. NASDAQ looks to be the key, however, as it has acted as the anchor of late. By anchor we are not saying it anchored the market, but is acting like an anchor, weighing things down of late along with the semiconductors. It is at a point to make the rebound; the 18 day EMA is near support and would also give it a higher low on this move. Many big name techs have pulled back as well; if they move higher the index moves higher.
Stocks are trying to rise after the position shuffling last week, wanting to keep with the overall trend and the holiday trend. After the Monday lower volume test the cobwebs may have been cleared. There are many stocks that have faded to near support, ready to move if given the catalyst.
Once again we can expect lighter volume as the week progresses. Thus any rally would be the holiday type where stocks rise on cheer and good will toward men. Actually, on the continuing trend and upside bias the market has shown overall despite the very choppy action this month. Indeed, we may see a bit more weakness Tuesday with NASDAQ undercutting the 18 day EMA before buyers move in. If volume should climb as NASDAQ pierces the 18 day EMA and cannot recover, that pretty much kills off a continued rally ahead of Christmas barring a big intraday reversal. It does not mean the overall rally is through, but if you cannot rally into Christmas what does that say for the market's strength?
With all of that said, Tuesday may give us one of the first clear reads on the market since the first of the month through last Friday's expiration. Stocks will have the pre-expiration moves behind them and we will see if the early month churn weighs them down or if they have got the selling out and are ready to make another push in the rally.
Support and Resistance
NASDAQ: Closed at 2127.85
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 2125.19
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2061.87
2050, prior resistance and the June high.
S&P 500: Closed at 1194.65
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 1189.37
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 1166.74
January highs at 1158
1142-1146 are the June highs and the October high (1142).
Dow: Closed at 10, 661.60
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 10,577
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the recent range.
The 50 day EMA at 10,415
September high at 10,342
The 200 day SMA at 10,239
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% actual versus 0.1% expected and -0.4% prior (revised from -0.3%)
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): 0.7% expected and -1.1% prior
Personal Income, November (08:30): 0.2% expected and 0.6% prior
Personal Spending, November (08:30): 0.3% expected and 0.7% prior
Initial Jobless Claims, 12/18 (08:30): 335K expected and 317K prior
Michigan Sentiment-Rev., December (09:45): 95.7 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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